Investing in individual bonds
Investing in individual bonds means choosing and buying them one by one, just as you would if you were buying a portfolio of individual stocks. (Learn more about the basics of what bonds are and how they work.) Here are some of the key features and tradeoffs of investing in individual bonds rather than funds.
Control and transparency: greater
Buying individual bonds means you have complete control over what you own (within the limits of the bonds available on the market, considering the amount of money you need to invest). You choose what you buy and whether you want to hold those bonds until maturity or try to sell them before they mature. You may also be able to better plan and control your income streams because you will know the maturity dates and coupon payment dates of the bonds you own. This also means you can view the exact details of what you own at any time.
Research and monitoring required: Greater
Building and managing a bond portfolio on your own can require significant research and ongoing monitoring. To build a diversified portfolio, you may need to invest in a wide range of different bonds from different issuers. You will generally be responsible for researching and monitoring the financial stability of each issuer, determining whether each bond is reasonably priced, and constructing a portfolio based on your income, risk tolerance, and general diversification needs. (Fidelity can help you do this, with our Fixed Income Research Center and Fixed Income Alerts.)
That said, the required level of research and monitoring may be reduced if you only purchase securities that do not carry credit risk, such as U.S. Treasury bonds, which are backed by the full faith and credit of the U.S. government, or certificates. deposits insured by the FDIC. (Keep in mind that FDIC insurance limits are currently set at $250,000 in aggregate deposits, per issuer, and per account type.)
Credit risk: variable
Investing in individual bonds rather than bond funds does not in itself present greater or lesser credit risk, that is, the risk that a bond issuer will not make its scheduled payments. If you build a portfolio of very high quality bonds, you may be taking on less risk, while building a portfolio of lower quality bonds may result in higher risk. That said, diversification can help reduce a portfolio’s overall credit risk, and achieving broad diversification can be more difficult with individual bonds.
Cost: varies
Buying individual bonds may incur transaction fees when you buy investments (and when you sell, if you choose not to hold them to maturity), but unlike bond funds, individual bonds do not. generally do not result in ongoing management fees. If you simply buy a portfolio of bonds and hold them until maturity, your total costs could be quite low. Placing more trades will generally increase your costs. Investors may also pay a markup when purchasing individual bonds and face a markup when selling individual bonds.
Investors pay no commissions or concessions when participating in reissue bond offerings with Fidelity, although there may sometimes be a fee if the reissue bond transaction is handled by a representative. Learn more about bond pricing. View Fidelity’s fee schedule for bond transactions.
Revenue frequency: Typically twice a year
When you invest in individual bonds, you will receive income each time a bond you hold makes a coupon payment or matures. Most bonds make coupon payments twice a year, although the exact dates on which they do so, i.e. whether in January and July or March and September, can vary depending on the bond .
The predictability of bond coupon payments can be a key attraction for investors choosing individual bonds. For example, it is possible to build a bond portfolio that makes equal coupon payments each month to target a consistent income stream. Another popular strategy is to build a bond ladder, purchasing bonds of different maturities. (Learn more about the potential benefits of bond ladders and try Fidelity’s Bond Ladder tool.)
Minimum investment amount: Larger
Investing in individual bonds generally requires a significantly higher initial investment amount than in bond funds. Bonds generally trade with a minimum order quantity, which can be as low as 1 (which corresponds to $1,000 face value) or as high as 100 (which corresponds to $100,000 face value) or more . And building a diversified portfolio involves purchasing individual bonds from many different issuers. This is why Fidelity generally recommends that when investing in bonds that present credit risk, such as corporate bonds or municipal bonds, you have at least several hundred thousand dollars allocated to fixed income securities in order to consider investing in individual bonds.
However, as with the note above on credit risk, the required investment amount may be reduced if you purchase securities that do not carry credit risk, such as U.S. Treasury bonds or credit-insured CDs. FDIC, as diversification may be less of a concern. . These can be purchased for as little as $1,000.
Liquidity (ability to access cash): lower
As mentioned above, with individual bonds, you will generally receive a cash inflow each time a bond makes a coupon payment or matures. If you need access to your capital before a bond matures, you can sell it, although this may incur transaction fees. Certain types of bonds that trade in more liquid markets, such as Treasury bills and some corporate bonds, may be easier to sell than most municipal bonds, where markets are thinner and less liquid. Selling before maturity can result in either a profit or a loss compared to the price you paid when purchasing.
Impact of rising or falling rates: potentially lower
When the level of prevailing market interest rates increases, the market value of individual bonds generally decreases. And when interest rates fall, bond prices rise. This relationship is true for both bonds held individually and for bonds held through a mutual fund. But investors who hold individual bonds will not realize this impact (i.e., with a realized capital loss or gain) if they hold their bonds to maturity and the bonds make all their payments as promised.
