Jim Peterson, vice president of the Center for Investment Research, says the hypothetical portfolios each consisted of five bonds, with maturities ranging from 2 to 10 years. A typical bond fund will contain many more bonds, but the study found that ''it doesn't take a tremendous amount of bonds to have reasonable diversification,'' Peterson says. Individual bonds are most appropriate for investors who plan to hold their bonds until maturity. If you need to sell before then, you'll have to find a buyer. If interest rates have increased since your initial purchase, you'll probably have to sell your bond for less than you paid for it.
Bond funds are much more liquid.
You can always redeem your shares at the fund's net asset value. You may lose money on the sale, but you won't have trouble finding a buyer. Your need for a regular source of fixed income. When you buy an individual bond, you earn the right to receive a fixed income payment at set intervals, usually semi-annually or quarterly. Bond funds also pay income, usually on a monthly basis, but the amount you receive can fluctuate.