Bonds versus Bond Funds

What you need to know about the risks of fixed income investing.

Whether to invest in individual bonds or bond funds is every investor’s personal decision based on investment objectives and factors that apply to his or her particular situation.

In general, bonds offer a predictable income stream and return of principal at maturity. Individuals usually invest in multiple bond issuers for diversification, to create availability of funds at different times in the future and/or minimize exposure to any given creditworthiness of an issuer. A bond investor wants to know what he owns, for how long and what his return will be if held to term. In general, bond funds are pools of bonds that are professionally managed for total return. The investor can expect variable income flows and bond funds do not have a defined term. The total return is dependent on the ability of the money manager to manage the portfolio. However, it is important to note that both of these investments are subject to risks which includes interest rate risk which affects the value of both bonds and bond funds. In general, bond funds provide potential for current total returns and are subject to variable principal value. Bonds create a predictable income and known value at maturity. In today’s low interest rate environment and since fixed income investments have had such a strong performance, it is more important than ever to ask yourself: “Do I want my investment professionally managed for total return or do I want to know that if I purchase a diversified quality bond portfolio I will be able to predict what my return will be and when my funds will become available?” However, simple asset allocation and diversification will not protect investors from losses. As always, the best place to start is with advice from a professional Raymond James Financial Advisor who can assist investors in choosing investments that best fit their own investment objectives.

Investment Considerations Bonds Bond Funds

Fixed income

Offer predictable income stream known at the time of purchase

Interest payments vary based on bonds that the fund's manager buys and sells, and on current market rates.

Principal protection

The amount of principal (i.e., par value) that will be returned at maturity is known at the time of purchase subject to credit worthiness of the issuer.

Since bond funds do not mature and their prices change daily (net asset value), it may difficult, if not impossible, to predict the value of an original investment at the time of sale.

Costs

Either a one-time commission or an annual fee and low individual transaction charges are paid when a bond is bought and sold

Sales fees are charged; In a case of a no-load fund, annual management fees typically apply

Capital gains taxes

Paid only if a bond is sold for profit prior to maturity date

- Paid if shares are sold for profit
- Paid when a fund manager sells bonds for profit (managers buy and sell bonds during the year, capital gains or losses are passed to investors) Investors may be liable for tax on imbedded gains even if they have not enjoyed the returns.

Knowing what you own

Investor knows exactly what bond is bought, its credit rating, coupon rate and maturity date. 100% of the money is invested and earning interest.

Investor knows the main objective of the bond fund (e.g., intermediate-term corporate bond fund), which the portfolio manager may not consistently follow, this is called “style drift.” Information is available to shareholders from fund periodically detailing the bonds held in the portfolio. In addition, bond funds are not fully invested, holding cash for administrative needs and redemptions.

Diversification

Several bonds are needed to achieve proper diversification. Remember: do not put all your eggs in one basket.

Greater diversification is achieved with one investment because funds invest in hundreds of bonds.

Liquidity

Can be liquidated at current value less a sales commission. The sales amount received may be more or less than original cost.

Can be sold at Net-Asset-Value (NAV), which may be more or less than original cost. There are no redemption charges on mutual funds sold through Raymond James.

Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Investors should carefully consider the investment objectives, risks, charges and expenses of bond funds before investing. The prospectus contains this and other information about the funds. The prospectus is available from your financial advisor and should be read carefully before investing. More details are available in a Guide to Mutual Fund Investing at Raymond James.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Past performance is no assurance of future results.

This communication is intended to improve the efficiency with which Financial Advisors obtain information relevant to their client's taxable fixed income holdings. This information should not be construed as a directive from the RJ&A Taxable Fixed Income Department to buy or sell the securities noted above. Prior to transacting in any security, please discuss the suitability, potential returns, and associated risks of the transactions(s) with your client. For additional disclosure information on any security listed in this publication, please contact a Raymond James financial advisor.

The information contained herein has been prepared from sources believed reliable but is not guaranteed by Raymond James & Associates, Inc. (RJA) and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Trading ideas expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Investors are urged to obtain and review the relevant documents in their entirety. RJA is providing this communication on the condition that it will not form the primary basis for any investment decision you may make. Furthermore, because these are only trade ideas, investors should assume that RJA will not produce any follow-up. Employees of RJA or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. RJA and/or its employees involved in the preparation or the issuance of this communication may have positions in the securities discussed herein. Securities identified herein are subject to availability and changes in price. All prices and/or yields are indications for informational purposes only. Additional information is available upon request.

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