Two popular ways to hold bonds in a portfolio are 1) to hold a collection of individual bonds or 2) to own shares of one or more bond funds. There are advantages and disadvantages to both approaches. Holding individual bonds guarantees return of your principal when a bond matures (assuming no defaults), but also requires a large amount to invest if you are to adequately “ladder” a portfolio to mitigate interest rate risks. If you have smaller amounts to invest, you can achieve better diversification with traditional bond funds or ETFs, but there is no guarantee that your initial investments will be returned at any time.
Defined Maturity Funds Make It Easier
Over the last year or so, new bond investment products have become available which combine the advantages of individual bonds with the advantages of funds. These so-called Defined Maturity Funds (mutual funds and ETFs) allow income investors to structure an income ladder that reduces interest rate risks while not requiring balances as large as would be required for individual bonds. Defined maturity fund products are currently available from Fidelity, iShares, and Guggenheim.