230) Differences between investing into Bond Market vs Bond Fund
Invest Direct into Bonds
1) Larger investment amount is required.
2) Less choice of bonds available for non-institutional investor.
3) Investor needs to monitor the bond investment directly. Lack of time will be an issue.
4) Lack of bond investment knowledge and time to trade bonds for better returns.
5) Investment returns are normally not reinvested and withdrawn. Not able to fully maximize the investment to compound the returns.
6) No need to pay initial service charge.
7) No need to pay for on-going management fee, trustee fee and other fund operation charges.
8) Investment are for long term until bond maturity. Redemption before bond maturity is subject to current market bond value. It can be lower or higher than bond face value.
9) Redemption before maturity depend on other bond buyer to buy the bond in the bond market.
10) Direct bonds are taking the full risk of the investment. Investor can lose their investment if the bond defaults. This means the bond issuer is not able to pay the yearly coupon payment and/or pay back the bond face value.
11) Direct bond investor needs to monitor the bond rating and any rating changes. To reduce the risk, bond investors normally invest into higher rating bonds and get lower returns.
12) Bonds are affected by interest rate risk. Higher interest rate, reduces the bond value. Lower interest rate, increases the bond value. Bonds that are held to maturity not able to optimise the bond value fluctuations.
13) Direct bond investors may not be able to buy bonds with different maturity periods. Mostly invests into shorter maturity bonds which gives lower return rates than longer maturity bonds.
Invest into Bond Fund
1) Low amount to start. Most funds can start as low as $1000.
2) Low amount to add more investment. Most funds can be added with as low as $100.
3) Able to switch to other bond funds, balanced funds, equity funds or money market funds. Investor can switch easily if the market changes.
4) Professional fund manager to manage the bond fund. The team of fund managers do research and look at the economics to decide on buying and selling of bonds.
5) Bond fund managers have a wider selection and access to more bonds.
6) Having a large investment amount enables the bond fund manager to have a lower cost per dollar. Better rates from the economies of scale.
7) Fund manager monitors the bond market and handle the operations.
8) Investment returns are reinvested and compound the investment returns. Fund manager uses the returns to invest into other bonds.
9) Investor no need to worry about the daily operations and market conditions.
10) Investor have to pay the initial service charge.
11) The bond fund pays the on-going management fee, trustee fee, auditor fee, tax consultant fee and other operation charges. The charges are calculated and deducted from the Net Asset Value. The published fund returns are already net (minus) the charges.
12) Investor can redeem partial or full amount at Net Asset Value. No penalty for redemption.
13) Bond funds invest into many different bonds. A small percentage of the investments are in the money market instruments. Some bonds can also invest into foreign bonds. Bond fund enables investment diversification which reduces investment concentration risk.
14) Bond funds are diversified into higher rating and lower rating bonds. Lower rating gives higher returns. The funds are also not allowed to invest into very low rating. Eg. Rating below BBB grade are not allowed to be invested by the fund.
15) Bond funds are less affected by interest rate risk. Fund managers can change the bond funds strategies during different market conditions. Fund manager sell bonds when expecting the interest rate going to increase. Fund manager buy bonds when expecting interest rates to reduce.
16) Bond funds are diversified into shorter term and longer term maturity. Longer term maturity gives higher return rates.
Definition:
Bond Yield = Bond Coupon Rate / Bond Price
Bond Fund Yield = Bond Fund Distribution / Bond Fund Price after distribution.
Do consult the professionals for advise and understand your investing requirements.
For more related articles:
239) Bond Specification & Calculation
https://highlevelrules.blogspot.com/2020/03/239-bond-specification-calculation.html
222) Does Bond Fund Move Opposite to Equity Fund?
http://highlevelrules.blogspot.com/2019/03/222-does-bond-fund-move-opposite-to.html
22) Bond Price Moves Opposite to Bond Yields
https://highlevelrules.blogspot.com/2017/06/bond-price-moves-opposite-to-bond-yields.html
48) Money Market Fund vs Bond Fund
http://highlevelrules.blogspot.com/2017/07/money-market-fund-vs-bond-fund.html
61) Unit Trust Bond Fund Vs Fixed Deposit
http://highlevelrules.blogspot.com/2017/07/unit-trust-bond-fund-vs-fixed-deposit.html
