Securities pricing is the bond market is complex and different from the stock market. While a firm usually has only one kind of common stock, it could have dozens or even hundreds of different outstanding bond obligations. Setting current bond prices is complex. Few individual investors have the required skill, knowledge, information, and experience to make such assessments.
For individual investors it is much more straightforward simply to hold bonds through a bond fund. Once a bond fund establishes its "style" for the type, maturity, and quality of bonds it will hold, it selects and purchases bonds with an eye toward maintaining that style. Maintaining targeted maturity is relatively straightforward. Determining investment quality is less straightforward, but bond mutual funds have analysts on staff and have access to the analytic services of bond ratings houses like Moody's,1 Standard and Poor's,2 and Fitch Ratings.3
Bond funds offer a much higher degree of diversification than most investors could achieve economically through the direct purchase of individual bonds. Bond funds offer a further advantage to individual investors, because a bond fund's professional traders should know how to trade efficiently in...
Sometimes, individual investors pay very high transaction expenses, when buying individual bonds. This is not an issue of bond market inefficiency. Rather, it is a problem of unfair treatment due to the obscurity of the bond pricing process and the willingness of certain traders to take advantage of individual investors.
Bond portfolio management is a relatively specialized investment securities activity. You might expect that certain bond mutual fund managers would be more skilled than others and would produce higher bond returns. Better performance due to investment skill could, of course, justify paying extra fees. However, investment science has not detected a relationship between paying higher fees and obtaining better returns from the bond mutual fund industry.
Works Cited
Vanguard. (2011). Bond Yields. Retrieved December 2, 2012 from https://personal.vanguard.com/us/FundsBondsMarketSummaryTable nvestopedia. (2011). Fixed Income Portfolio. Retrieved December 2, 2012 from http://www.investopedia.com/articles/bonds/07/fiportfolio.asp?viewed=1
