3 Reasons Bond Funds Are Better than Bonds

Investing in bonds and bond funds can provide you with a similar type of investment. However, bond funds are an investment that have several advantages over traditional bonds. Here are a few of the reasons that bond funds are better than bonds.

1. Easier Purchase

One reason that bond funds are better than bonds is that they are much easier to purchase. When you need to purchase shares in a bond fund, you can simply do so from any brokerage account. It is as simple as investing in any other type of mutual fund. With bonds, it is not that simple. You are going to have to open an account with a bond broker in order to purchase bonds. In many cases, this involves a minimum investment of at least $5,000 just to open the account. You have to work with your bond broker in order to find the type of bond that you are looking for and then they will help you make the purchase.

2. Diversification

Another big reason that bond funds are better than bonds is because of the diversification that they provide. When you invest in individual bond, you are going to be subject to how that bond performs. If the value of the bond declines because of interest rate increases, you are stuck with it unless you take a loss to sell it. With a bond fund, you are purchasing a share of a very diversified portfolio. The portfolio is made up of hundreds or thousands of different bonds. This means that if one bond does not do very well, the rest of the bonds are going to be there to make up the difference. When a company goes out of business, the bond holder is supposed to be toward the front of the line to get their investment back because they are considered to be a creditor. However, sometimes it does not work out like this. If that is the case, you want to be an investor in a bond fund instead of an individual bond. If you own an individual bond in a company that goes out of business, you may lose your entire initial investment.

3. Professional Management

Investing in bond funds is also going to provide you with professional management. When you are an individual investor, you have to make all of the individual investment decisions for yourself. This means that you have to research all of the bonds that you are potentially going to invest in an make a decision that you think is best. When you are an investor in a bond fund, you are not going to have to worry about this. You will simply invest in the bond fund and the fund manager is going to choose all of the bonds for you. They are also going to decide if and when to sell the bonds that are in the portfolio.