InvestorQ : How do bonds weigh versus bond funds in terms of risk and returns? What is more suitable for a retail investor?
Debbie Mascarenhas made post

How do bonds weigh versus bond funds in terms of risk and returns? What is more suitable for a retail investor?

Answer
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Crowny Pinto answered.
1 year ago


Let us look at this comparison on various parameters before taking a call on which is more suitable.

Diversification

Because bond funds and bond ETFs are generally diversified across multiple securities, a single purchase made with a limited investment amount can provide access to potentially hundreds of different issuers. This can help lessen the downside impact from a credit event impacting any one of the issuers.

Liquidity

The liquidity risk can be more exaggerated with an individual bond. In certain cases there may not be an active 2-way market for a specific bond and the price discovery process could take several hours. With a bond fund, on the other hand, the investor has access to buy or sell at the end of the day, and with a bond ETF, throughout the market trading day.

Return of principal

A bond fund or bond ETF does not mature and its value will fluctuate. While a bond's price can fall, the investor has an option to wait until it matures or is redeemed.

Income predictability

The future cash flows of an individual bond from coupons and principal payments are contractually transparent and can be predicted—with the caveat of insolvency as described above. With a bond fund or bond ETF, because the underlying holdings are bought and sold, the income that they generate in the aggregate will fluctuate over time and is unknowable in advance. This is one case where bond have an edge.