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 and commission 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 only knows the main objective of the bond fund (e.g., intermediate-term corporate bond fund), which may be changed by the fund manager, this is called “style drift.” 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.