What is best for me : bonds or bond funds? The answer to this question is not always easy to answer and it depends also how long you don’t need your money. If you invest in a bond then you need to keep them for the term according the term of your bond. It is possible that you buy a bond which gives you a certain interest during 7 years or even more you need to keep them to the end of this term otherwise you lose a lot of money.
The greatest advantage of investing in bonds is that you are sure that you will receive the interest which was determinate when you bought these bonds.
Investing in bond funds works a little bit different you invest also in bonds but the great difference is diversification. If you invest in a bond you need in many cases a lot more money for investing and investing in a bond fund is possible with a little amount.
If you invest in a bond fund the greatest risk is inflation and because the professional managers always buy and sell different bonds the value can decrease on times when the Fed will decrease the interest rate.
Of course there are many kind of bond funds. Some invest in emerging markets. The interest rate is much higher there and if you invest in bonds of emerging market the currency can be a great problem. If you invest by example in a bond of Turkey; deflation of the currency of Turkey is a great risk and it is possible that you will lose a lot of money. If you invest in a bond fund the risk is not so high because of the diversification.
The greatest advantages of bond funds are :
– low minimum to invest
– professional management
– every month or every year a dividend (a permanent income)
– you can reinvest the dividends immediately
– the market is always : ask and demand; in case of bond funds they can always buy on a lower price than in case you buy a bond individually.
In my opinion if you consider to buy bonds or bond funds you can best choose for bond funds; it will give you a better return on the long term.