Many investors who want to reap the good returns available in the corporate bond market buy shares in bond mutual funds instead of individual bonds - or in addition to individual bonds. They do so for the same reasons investors have flocked to mutual funds of all kinds in recent years - diversification, professional management, modest minimum investments, automatic dividend reinvestment and other convenience features.
Diversification is an especially important advantage of bond funds.
Many investors in individual bonds buy only a few securities, thus concentrating their risk. A fund manager, by contrast, spreads credit risk, interest-rate risk and, indeed, all other kinds of risk, over many bonds. Different issuers, sectors, credit ratings, coupons and maturities are all represented in a diversified portfolio. However, lower risk does not mean no risk. All the underlying risks that affect bonds affect bond funds - but not as sharply.