Bonds and Bond Funds

theshortstack

Apologies for the basic question, but what's the difference between Bonds and Bond Funds?

Am I right in thinking that buying into a fund means you're paying someone else to manage the purchase and sales of bonds, whereas Bonds are held directly by the private individual?

Are there other specific advantages to funds to make the cost worthwhile and do people generally go with one above the other?

Thanks for the help!

dunstonh

but what's the difference between Bonds and Bond Funds?

Bond is one of the most misused terms going in financial services. So, many bonds are not actually bonds but just called that marketing purposes. For example, fixed term deposits are now regularly called bonds or savings bonds by the banks. Investment Bonds (a tax wrapper for investments) should really be called single premium whole of life assurance or single premium endowments. However, neither of those two names are very friendly on marketing.

You then have corporate bonds, strategic bonds, high yield bonds...... (forms of lending to companies who pay the money back with interest). These can cover low risk through to high risk.

Am I right in thinking that buying into a fund means you're paying someone else to manage the purchase and sales of bonds, whereas Bonds are held directly by the private individual?

Effectively, yes. Bond funds also benefit from a higher level of consumer protection than holding a directly purchased bond.

Linton

Assuming you are talking about corporate bonds and government bonds (gilts), not fixed rate deposit accounts....

Bond funds and the underlying bond investments behave differently. The individual bonds guarantee to pay a fixed amount each year for a fixed number of years and then refund the face value at maturity. So when you buy a bond your future finances are guaranteed, unless of course the bond issuer goes bust.

A fund is simply a large collection of individual bonds and so it is impossible (barring "end of the world as we know it" scenarios) to lose all your money. But you do lose the guaranteed future as the maturity of any one bond has virtually no effect on the total fund.