Corporate Bond Funds vs Corporate Bonds

Both corporate bond funds and corporate bonds present you with a way to invest in the success of a company. With both options, you are lending money to a company for their business purposes with the expectation of earning interest. However, these two investments work by different methods. Here are the basics of corporate bond funds and corporate bonds.

Corporate Bonds

Corporate bonds represent a very simple concept. When you buy a corporate bond, you are essentially lending your money to the company at a certain rate of interest. They pay you a determined interest payment regularly, and they use your money how they see fit. Then at the end of the bond term, you can cash in the bond certificate and receive your full investment back. 

This represents a fairly safe form of investment. Since you are considered a creditor to the company, even if they go bankrupt, you will be at the front of the line to receive payment from the liquidation of their assets. This means that you will rarely lose your initial investment in a bond. 

Corporate Bond Funds

The corporate bond fund is a variation on investing in corporate bonds. The corporate bond fund is essentially a mutual fund that purchases corporate bonds as their main form of investment. With a corporate bond fund, the investment decisions will be made by a fund manager. Therefore, this represents a more passive form of investment for you. You will simply by shares in the bond fund, and the fund management team will make all of the decisions for you. They will hold some bonds over an extended period of time, while selling others. This can make the interest payments that you receive fluctuate from one payment to the next. 

With a corporate bond fund, you are also investing in several different bonds at once. The bond fund purchases many different bonds as a collective group. Everyone who owns a share in the fund owns an equal part of each bond. This provides a level of diversification that you cannot get from investing in a single company. Therefore, if bonds are a safe form of investment, this form of investment is technically even safer. If one corporation for which the fund owns a bond goes bankrupt and you are unable to recover any of the initial investment in that corporation, you still have all the other bonds in good shape. The likelihood of all of the companies that make up the bond fund going bankrupt without any assets at the same time is very low. 

Which to Invest In?

While the investments are similar, they present you with some different benefits. If you like to control your own investment decisions, corporate bonds will most likely be your best option. If you like a safe, passive form of investment, then corporate bond funds may be the better option of the two. 

blog comments powered by Disqus
Scottrade