The bond market has been a remarkably competitive one lately, which will be no real surprise given how people have a tendency to gravitate towards bonds during poor economic times and/or periods of great volatility within the stock market. For several investors, the question of individual bonds vs. bond funds is the one that keeps them awake at nights. Which the main bond market is the main one on which an investor should focus? To help you together with your bond market planning, below are a few things to understand about individual bonds and bond funds:
-Individual bonds provide the investor a reliable supply of income (investors typically receive the interest from these bonds twice per year) as well as the security of understanding that the original investment (i.e. the principal) is going to be returned after the bond matures. However, individual bonds may be sold by the investor before reaching their maturity date.
-Investors can approach bond funds as they'd the stock market. Bond funds are traditionally purchased by a group of those who pool their investment and then hand it to a broker. While individual bonds provide a twice-yearly payment, bond funds usually offer payment on a regular basis. However, that payment fluctuates significantly more than a person bond.
While many people have the misconception that it's simpler to diversify with bond funds, in today's interest rate and bond market environment, it is in fact safer for an investor to get a couple of individual bonds and get less diversification than putting any amount of money into a relationship fund. The bonds in funds are usually changing to keep the fund at a particular time period and so the investor hardly ever really knows what bonds their capital is invested in. With an individual bond, the investor knows exactly what is paying the principal and interest on each of the bonds. A 10 year bond fund has to keep that point frame so in 5 years an investor will still own a 10 year fund with different underlying securities than when he or she first bought it. When an investor buys a 10 year individual bond, in 5 years that same bond will likely then be a 5 year bond which will mature on a particular date.
With interest rates being only they currently are, it is very dangerous for an investor to place capital into a relationship fund because when they would like to manage to get thier cash back, they will have to sell out of the bond fund which is at a reduced price when interest rates start to rise. With an individual bond when rates change, the investor continues to earn the initial yield he or she bought the bond at and can reinvest their principal at the existing rates when the bond matures.
-When buying a relationship fund, it is always crucial that you ask the broker what issuers are the underlying securities from, what is the revenue for these securities, and what ratings do the underlying securities have. premium bonds invest UK This way the investor is fully conscious of what he or she is putting their hard earned capital into. It can be very important to the investor to ask what fees are connected with the bond fund as most funds have plenty of fees which will eat into an investor's profit. Bonds funds are known if you are highly lucrative for brokers or salespeople.
An investor also needs to ask the broker what the SEC yield is when buying a relationship fund. Many brokers quote the existing yield of the fund which will be almost always higher than the SEC yield which will be the true return on the investment. When buying individual bonds the SEC Yield or yield to worst case scenario is usually quoted to the investor.
For somebody that is concerned with diversification, it is really a common misconception an investor can have more diversification by way of a bond fund; this isn't true. When an investor buys a couple of different individual bonds, he or she is simply creating their particular fund. The investor can tailor their portfolio or 'created fund' to their specific investment goals by picking and choosing the particular bonds that enter the portfolio. Not only can the investor get excellent diversification and have a portfolio fitting their specific needs, but he or she'll know the true quality of every security he or she owns.
