Bonds vs. Bonds which are right for you?

As an investor, you may find that bonds can be a valuable part of your portfolio. But how should you invest in bonds? Basically, you've got two choices: individual bonds or bond-based mutual funds. Which approach may be right for you?

There's no one right answer for everyone. So let's review some of the common reasons for investing in bonds and see how they are addressed by individual bonds and bond funds:

• Diversification - By investing in bonds, you can help diversify a portfolio that may be dominated by stocks. (Keep in mind, though, that diversification by itself cannot guarantee a profit or protect you against loss). While individual bonds can help diversify your holdings, you may be able to achieve broader diversification by investing in a bond fund, which may own a mix of corporate and government bonds.

• Fixed rate of return - When you buy an individual bond, you receive a fixed interest rate and predictable interest payments. Until your bond matures, or unless it is "called" (bought back) by the issuer, you will always receive the same rate of return. But a bond fund does not pay you a fixed rate of return; instead, you receive dividends that can fluctuate based on the underlying bonds' interest rates and capital appreciation.

• Return of principal - If you buy an individual bond, you will get your principal back when the bond matures, provided the issuer doesn't default. (However, before the bond matures, its value can fluctuate, based on current market interest rates.) Bond funds do not mature and have no obligation to return your principal, so, depending on current market values, you may lose some of your initial investment when you sell your shares.

• Costs - You can invest in most types of bonds for a relatively small fee or commission. But if you buy a bond fund, you will be subject to the same types of charges - such as sales charges, management fees and service fees - that are attached to many types of mutual funds.

• Taxes - When you own individual bonds, you pay current income taxes on your interest payments, but you won't be subject to capital gains if you hold your bonds until they mature. However, if you purchase bond funds, you may be subject to capital gains taxes in two ways: if you sell your fund shares for a profit or if the fund manager sells an underlying bond for more than it's worth. If that happens, the capital gain - and the tax obligation - will be passed on to you. This increased capital gains liability is one reason many people put bond funds in a tax-deferred vehicle, such as an IRA or a 401(k).

Before investing in a bond or bond fund, consult with your financial advisor. Also, before purchasing a bond fund, read the prospectus carefully. The prospectus contains more complete information, including the fund's investment objectives, risks, charges and expenses as well as other important information that should be carefully considered before you invest or send money.

By getting the help you need, and by doing some research, you can find the bonds or bond funds that can help you make progress toward your key financial goals.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Submitted by Wilbur F. Yates, an Edward Jones Financial Advisor with offices at 619 E. Kay St., Kilgore, TX 75662.