The Best Way to Invest in Corporate Bonds
The main reason to invest in corporate bonds is current income and safety of principal. Numerous corporate bond funds tout diversification and professional management as their advantages but you are best off buying individual corporate bonds.
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Instructions
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Diversify. Many publicly traded companies issue bonds. By buying bonds of multiple issuers, you will protect yourself against an occasional default by in effect creating your own bond fund.
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Hold bonds to maturity. Bond funds have no maturity dates. When interest rates rise, bond prices fall. A drop in the price of a bond fund can be permanent but if you hold an individual bond to maturity, you will get back its full face value so your principal is safer. Bonds are not as liquid as stocks but are still easy to sell, although you may get more or less than what you paid for them. Selling a bond fund is very easy, sometimes too easy. Investors often sell in a panic when they start seeing losses. An extra step that is required to sell a bond may prevent you from making a decision that you may regret later. Besides, if you hold to maturity, the drop in price will be temporary.
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Maximize your income by reducing your expenses. Bond funds charge expenses that come out of bond interest but if you hold a bond outright, you get the entire amount, and there is no cost to hold it. When interest rates are low, a 1 percent expense ratio can cut your income by one-third if corporate bonds are paying 3 percent on average. A bond markup (the commission to buy a bond) is less than the annual expenses charged by a bond mutual fund.
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Ladder maturities. Buy bonds that mature at regular intervals to smooth out interest rate fluctuations is an option.
Select maturities that fit into your overall plan is another option. You can buy bonds that mature when you need the money--to pay for college, make a major purchase, and so on.
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Create a monthly income stream. Bonds pay interest every six months but you can select bonds that pay interest in January and July, February and August to create a monthly income stream.
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Select the credit quality you feel most comfortable with. Every bond has a credit rating based on the issuer's ability to repay. Higher-rated bonds pay less interest and vice versa. You can select the right balance between credit quality and income that you feel most comfortable with.
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