The following article was contributed by Ottawa-based financial planner Rick Sutherland, CLU, CFP, FDS, R.F.P.
Bonds Versus Bond Mutual Funds – Which is Better?
We are often asked the question ‘Why would I invest in a bond mutual fund as opposed to buying individual bonds?’ There are many reasons why one would choose to own a bond fund rather than owning bonds directly.
Bonds can sometimes be difficult securities for individuals to buy and sell. This can give the bond fund greater liquidity (the ability to convert to cash) than owning individual bonds.
A Bond fund offers instantaneous diversification. Much like equity mutual funds, bond funds are comprised of many different fixed income securities. This gives the investor an optimal mix for safety and diversification. The term to maturity of the bonds can range from short-term (1 to 5 years) to long-term (over 30 yrs) and everything in between. All levels of government including federal, provincial and municipalities issue bonds. Even corporate bonds can be added for higher returns and a little added risk. As an individual you would need to be very wealthy to duplicate the diversification offered through the ownership of a bond fund.
When talking about the Bond market, size does matter. Bond fund managers can be trading millions of dollars each day. This gives them considerably more purchasing power than individuals. The result is better pricing and potentially better returns for bond fund investors.
Bond fund managers are considered institutional investors, giving them a greater access to available bond inventory at a cheaper price. Depending on their relationship with the bond dealers the bond fund manager may be given exclusive access to bonds on an “initial issue” basis. The retail bond investor is rarely offered an opportunity to participate in an initial issue. You are typically limited to what the bond dealer is offering at their asking price with no ability to do a price comparison.
So while there are individuals that can build and manage their own bond portfolio, most people do not have the time, resources or the expertise to take on this challenge. For ease and efficiency investors receive good value for the management fees charged by owning bond funds.
This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 613-798-2421 or E-mail at firstname.lastname@example.org. Website: http://www.invested-interest.ca/