Bonds versus bonds funds
A bond fund is a mutual fund or ETF that has invested in a number of different bonds. These funds often have a specific focus, such as:
- tracking a certain index, such as the DEX Universe Bond Index,
- buying bonds from a certain country, like Canada or the United States,
- buying government bonds, or
- buying corporate bonds.
Before you invest, read the fund’s prospectus to understand the fund’s approach to investing and the risks.
5 differences between bonds and bond funds
|Feature||Individual bonds||Bond mutual funds and ETFs|
|1. Choosing investments||You or your advisor chooses individual bonds.||A professional fund manager chooses individual bonds for the fund.|
|2. Risk||Risk depends on the type of bond you invest in. More variety leads to better diversification. Unless the issuer defaults, you will get back the face value at maturity.||Mutual funds and ETFs are diversified – they hold many investments. But risk will vary depending on the number of and types of bonds held in the fund. More variety leads to better diversification.
With a mutual fund or ETF, you could lose money. The value of most funds will change as the value of their investments goes up and down.
|3. Return||You know exactly how much interest you’ll receive and can calculate what your return will be, whether you hold the bond until maturity or sell it before the maturity date.||You generally won’t know how much you’re going to receive in any given year.
This is because the fund itself doesn’t have a maturity dateMaturity date The date when an investment becomes due. On that date, you get your money back without any penalty. Any interest payments stop.+ read full definition. Income from a fund fluctuates as the underlying bondBond A kind of loan you make to the government or a company. They use the money to run their operations. In turn, you get back a set amount of interest once or twice a year. If you hold bonds until the maturity date, you will get all your money back as well. If you sell…+ read full definition investments change. Returns may be a combination of interest and capital gains.
|4. Buying and selling||You can buy and hold a bond to maturity and get back the face valueFace value What you pay to buy a bond or some other investment.+ read full definition, or you can sell it before it matures.
Your ability to sell varies depending on the type of bond. Some types of bonds, like strip bonds, can be harder to sell than others.
|You can buy and sell mutual funds on any business day.
You can buy and sell ETFs on the exchange they tradeTrade The process where one person or party buys an investment from another.+ read full definition on, on any trading day.
|5. Fees||CommissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition are built into the price of the bond.||You may pay a sales charge when you buy or sell a mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition.
You’ll usually pay a commission every time you buy and sell an ETF.
Mutual funds and ETFs charge management fees and operating expenses (known as the management expense ratio or MER).
5 key points
Bonds and bond funds work differently when it comes to:
- Choosing investments,
- Buying and selling,