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|Should I buy a bond or bond mutual fund?
By The-Adviser.com -
|New York -
Purchasing an individual bond is the best method for timing a specific
income or money need with an individual situation. You can match the maturity and income
needed almost exactly. One key risk factor is that you are not diversified. In general, if
you are purchasing a U.S. Government backed bond, we believe the risk is minimal.
Bond mutual funds are suitable for individuals seeking diversification and want to invest in many types of bonds. Individual purchasing bond mutual funds need to be very concerned about fund expenses. In general, bond mutual funds buy the same type of bonds that you could buy individually and then they charge additional fees. The bond mutual fund with the lowest expenses generally will come out ahead in the long run.
Also, when considering a bond mutual fund, you need to be certain that you are not investing in a mutual fund that uses derivatives or stock dividends to boost income or take on additional aggressive. Many bond funds use aggressive derivatives which although they may create additional income, expose investors to risk they may not be aware of. Keep in mind, the SEC requires that a mutual fund that has a descriptive name maintain only 80% of the assets in the name suggests. In other words, a US Treasury Bond Fund may have up to 20% of other assets.
Bond mutual funds generally have higher investment expenses when compared to an individual bond.
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