Bond Vs Bond Funds: What You Need to Know

You’ve probably heard the terms Bonds and Bond Funds thrown around in reference to your investments. Making a decision to dedicate a portion of your portfolio to one or the other can be a bit intimidating. The experts at Broussard Poché, LLP can help you make an informed decision.

First of all, there is no right or wrong decision, each option has pros and cons. It’s all a matter of choosing what works best for your situation. Let’s look at a breakdown of individual bonds and a mutual bond fund that invests in bonds.

Individual bonds

Regular Interval Pay Out: Individual bonds pay out a defined amount of income at regular intervals. Normally, twice a year a bond will issue a fixed coupon. The bond’s principal is returned to you when the bonds mature.

Fixed Rate of Return: You can buy into a fixed rate of return, or “yield” at the time of purchase. This yield is the annual return on your initial investment through some predetermined future date.

You can sell individual bonds before the maturity date, but selling before maturity can result in either a profit or a loss, depending on a few factors. These factors are, the price you paid for the bonds, the amount of interest you’ve already collected, the current interest rate environment, and the current price of the bonds.

Investing in individual bonds does mean that you will have to have enough funds to enable you to diversify across several different issuers. And it’s important to note you’re responsible for researching and monitoring the financial stability of the issuer of you bonds, financial advisors can help with the research and risk assessment.

Bond funds

Bond mutual funds allow you to put your money into a pool with other investors. A professional will invest that money according to best opportunities and the bond fund’s stated investment goals.

Some bond funds invest in short and long-term bonds from a variety of issuers including the U.S. Government. Others will focus on a smaller mix of bonds, like a short-term Treasury fund or a corporate high yield bond fund.

Bond funds invest in many different securities, so diversification is easier with just a small investment. Income payments are made monthly and distribution may vary from month to month.

When you sell shares in a fund, you receive the bond fund’s current net asset value (NAV), which is the value of all the bond fund’s holdings divided by the number of fund shares, minus a redemption fee. It’s important to note that bond funds buy and sell securities frequently, and rarely hold bonds to maturity. That means you can lose some, or maybe all of your initial investment.

This can feel like a lot of information to take in, that’s why it’s important to have a financial advisor that you trust. The professionals at Broussard Poché, LLP can help you choose the right place for your investments.