If you want to know whether you should invest in individual retirement bond funds, you need to understand the benefits of owning bonds. A number of investors make use of bonds as the generator of income as they depend on returns with the objective of supplementing living expenses during retirement. Competent advisors, as well as individual investors, take bonds as a tool for the reduction of portfolio volatility. If the goal of holding bonds is controlling portfolio risks, owning bond funds is certainly a good option.
Safety
A number of investors have the wrong notion that owning the bonds has lesser risks. The fact is that treasury or corporate bonds are known to be subjected to daily change in credit conditions and interest rates. Individual bond investors may be delighted to know that the principal will be returned to them at the end of the maturity period. However, there are chances of fluctuation of the principal during the maturity period. With the rise of interest rate, the bond principal will reduce. If the owner of the bonds feels it important to seek position post maturity date, they may encounter losses during the time of rising interest rates.
Costs
While individual bonds do not need ongoing operating and management expenses, there are associated expenses which are inclusive of bid-ask, brokerage fees or commissions. In addition to this, retail investors procure less favorable rates in comparison to the institutional investors. The prices of trading individual bonds are difficult to pin down accurately. In case there is a domain for an institutional trader to incur obscene profits in the market, it is considered to be the bond market.
As you buy a bond fund, you know that the price will include an expense ratio and a transaction fee. There are a number of low-priced bond funds available, such as Vanguard Bond Index. However, you should consider the associated risks in order to invest in retirement bond funds.