From Plancorp’s perspective, the answer for most investors is bond funds.
Bond funds, especially in the municipal (tax-exempt) market, can offer many advantages over a portfolio made up of individual bonds…
- Lower costs
- Broader diversification
- Professional management
- Cash flow efficiency
- Stable portfolio characteristics
- Easier liquidations
A more detailed explanation of the advantages of investing in bond funds as opposed to individual bonds follows:
- Significant size and resources of bond funds allows for lower transaction costs and tighter bid-ask spreads than for investors trading in individual bonds.
- Costs of operating a bond fund are spread across many shareholders to keep costs low.
Larger pool of assets allows bond funds to spread investments across many different issuers, credit qualities and maturities.
Bond funds are managed by professionals with access to extensive research and market information, and experienced traders.
Cash Flow Efficiency
Bond funds, unlike individual bonds which typically pay interest semi-annually, can generate income on a monthly basis, which generally makes for much more efficient cash flow management.
Stable Portfolio Characteristics
Due to portfolio size, each individual maturing bond has less of an impact on a portfolio.
Investors can comfortably make withdrawals from a bond fund without impacting the fund’s investment characteristics.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.