Bonds or bond funds
Q – Many investment advisors have mentioned that around 20%-30% of your portfolio should be in low-risk investments such as bonds. What are the advantages of purchasing individual bonds over purchasing a similar amount in a bond fund? – J.Z., Winnipeg
A – There’s a running debate on this issue among investors. Many favour buying bonds directly because in doing so you avoid the annual management fees charged to bond funds as well as possible mutual fund sales commissions.
If you are only planning to buy a few high-quality bonds and hold them until maturity, that’s probably the best way to go.
Bond funds are more expensive but they offer the advantage of diversification and active management. A good bond fund manager may be able to obtain a higher return for you, even after fees, than you’ll get by doing it yourself. Also, there are several types of bond funds so you have more choice. Right now, short-term bond funds are doing quite well. – G.P.