Individual bonds and bond funds have many similarities. They are both major components of the fixed income portion of your portfolio, both pay interest to their investors on a regular basis and both carry similar risks (call or email me with questions on the risks). Below are some of the major differences:
A) The current value of an individual bond in your portfolio does not impact the payments you receive, so its value at any point in time is only of minor importance.
B) Once individual bonds are purchased, your cash flow is known. With bond funds, the amount of future interest payments varies monthly.
C) Experts agree that investors generally need at least $250,000 to properly diversify a portfolio of individual bonds, versus $1,000 for a bond fund.
D) There is little transparency in the pricing for individual bonds and the buy/sell spreads are very large. Bond funds are priced on a daily basis with the price visible to all market participants.
E) Minimal oversight of bond funds is needed, while portfolios of individual bonds must be monitored with detailed knowledge of the underlying issuers.