BONDS OR BOND FUNDS: WHICH BUYING OPTION IS RIGHT FOR YOU? (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

In the blazing stock market of the 1990s, bonds were often the forgotten stepchild of the financial world. And yet bonds have always offered some major advantages to investors. There's the regular income stream provided by the interest payments, of course. And bonds also can help reduce the investment risk in a portfolio dominated by stocks.

How can you buy bonds? The two most popular options are purchasing them individually or investing in a bond-based mutual fund. Each choice has distinct advantages:

* Individual bonds offer more stability of principal. When you buy a bond, and you hold it until maturity, you'll get the full face value back, provided the issuer does not default. But when you buy a bond fund, your shares will fluctuate in value -- which means they could be down when you want to sell them.

* Individual bonds give you fixed-interest payments. You'll know how much you can expect from the interest payments you receive from individual bonds. But bond fund dividends are variable.

* Bond funds offer more diversification. When you buy a bond fund, you get instant diversification, because the fund can be composed of many different types of bonds: Corporate, municipal, long-term, short-term, etc.

* Bond funds offer professional management. Like other mutual funds, bond funds are professionally managed. You won't get this benefit from individual bonds. Apart from these factors, you will have to weigh in investment cost. Bond funds, like all other mutual funds, have management fees, marketing costs and other expenses. You may have to pay a commission when you buy individual bonds, but you shouldn't incur other costs beyond that.

The type of bonds you're interested in also will affect your decision. If you want the safety offered by Treasury securities or AAA-rated bonds, you may be better off buying individual bonds. You can purchase Treasury bonds through a government program called Treasury Direct, which has basically no investment costs associated with it, but Treasury Direct bonds do not enjoy the liquidity of a secondary market unless they are transferred to a broker.

If you'd rather purchase corporate bonds than Treasuries, you'll have other considerations. It's expensive to build a diversified portfolio of individual corporate bonds, which generally have face values of $1,000 or $5,000. In fact, to achieve a substantial level of diversification in your corporate bonds, you may have to invest $50,000 or more. But if you have that amount of money to invest, then you may be able to save money by buying individual corporate issues. And the same holds true for municipal bonds, whose earnings are typically free from federal income taxes.

Finally, if you're buying lower-quality high-yield bonds, you will probably benefit from the diversification and professional management bond funds.

Of course, there's no rule that says you have to choose only bonds or only bond funds. You may decide to invest in both. However you do it, getting bonds in your portfolio is often a good idea so start exploring the possibilities today.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.