Bonds: Buy Them Individually or Wrapped in a Fund?

When you're building a diversified investment portfolio, there’s one asset class that often flies under the radar: fixed income. Whether through individual bonds or bond funds, these tools can help manage volatility and provide more stability in uncertain markets.

So, which option is better — individual bonds or bond funds? The answer depends on your goals, timeline, and comfort with risk.

What Are Bonds and How Do They Work?

At a basic level, a bond is a loan. You, the investor, lend money to a government or corporation, and in return, they agree to pay you interest over time and return your original investment at the end of the term (known as the maturity date).

Bonds come with different ratings based on the creditworthiness of the issuer — the higher the rating, the lower the risk (and typically, the lower the interest rate). Lower-rated bonds (often referred to as "high-yield" or "junk" bonds) offer higher potential returns, but they also carry more risk.

How Do Bond Funds Compare?

Bond funds pool money from many investors to buy a diversified selection of bonds. These funds may focus on a specific segment of the bond market — such as government, municipal, corporate, or international bonds — or track broader indexes that represent the entire market.

Unlike individual bonds, bond funds don’t have a fixed maturity date. Instead, fund managers buy and sell bonds regularly, which means the fund's yield and value will fluctuate based on interest rates and market dynamics.

Two ways Bond Funds can provide value:
- Interest income (yield): Generated by the bonds the fund holds.
- Market price movement: As bond prices rise or fall, the fund’s overall value can increase or decrease.

It’s important to focus on total return, not just yield. A bond fund with a modest yield might still deliver strong returns due to market price appreciation.

Pros and cons of each approach

Individual Bonds:

✅ Predictable income if held to maturity
✅ Known maturity date and interest rate
⚠️ Less flexibility if rates change
⚠️ Harder to diversify unless you have significant capital

Bond Funds:

✅ Built-in diversification
✅ Easier to buy and sell
✅ Actively or passively managed options
⚠️ No guaranteed return of principal
⚠️ Market value fluctuates with interest rates and economic conditions

One key consideration with individual bonds is the potential for call risk — the issuer may repay the bond early if interest rates drop, leaving you to reinvest at lower rates. Bond funds can help manage this and other risks (like credit risk or downgrades) through diversification and professional management.

what makes sense for you?

If you’re looking for predictability and plan to hold until maturity, individual bonds could play a role in your portfolio. But if you value simplicity, liquidity, and professional management — especially with a smaller starting investment — bond funds may be a more flexible fit.

For many investors, the right answer isn’t either-or. A combination of both can help you balance stability and income with ease of management.

There are always plenty of investments competing for your attention. Fixed income may not be the flashiest, but it plays an essential role in helping create a resilient portfolio — acting like a watchdog that helps protect against unpredictable markets.

For more guidance on building a diversified portfolio and understanding your options with bonds and bond funds, explore our services or speak with one of our financial professionals today.

Disclaimer:

The information provided here is for general informational purposes only and should not be construed as professional tax advice. Tax laws and regulations are complex and subject to change. For personalized advice tailored to your specific situation, it is always recommended to consult a qualified tax professional or accountant who can provide expert guidance based on your individual circumstances.