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Bonds vs. Bond Funds
Investing in individual bonds can be complicated. Bond funds, however, offer simplicity, professional management, instant diversification and monthly dividends.
Compare bonds and bond funds
Investing in bonds can be daunting for the individual investor because of the scarcity of information, the complexity of the bond market and the high initial investment requirements.
Information is not readily available. Nationally recognized credit rating agencies can only rate a fraction of the 50,000 municipal bond issuers and their 2 million outstanding bond issues. Even leading financial news sources provide minimal coverage of the vast municipal bond market.
Bond funds offer simplicity. Municipal bond funds make investing in bonds easy for people who want the benefits of municipals in their portfolios, but don't have time to research credit ratings and monitor fluctuations in individual bond yields and prices.
Bonds require high initial investments. Individual municipal bonds typically cost between $1,000 and $25,000. To achieve diversification within the bond portion of your portfolio, you'd need to purchase numerous bonds from multiple issuers at $1,000 to $25,000 each.
Bond funds offer more liquidity. Municipal bond funds allow shareholders to buy or sell shares daily at net asset value. For individual bonds, bond market liquidity constraints can make selling small blocks of individual bonds at equitable prices difficult.
Since municipal bond fund prices fluctuate, you may have a gain or a loss when you sell your shares. However, if you hold individual bonds until maturity, you generally will receive the full face value from the issuer.
Franklin's tax-free income funds provide additional advantages over individual bonds, including:
| Features | Franklin Tax-Free Income Funds | Individual Municipal Bonds | |
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Front-end and, in some cases, back-end sales loads, management fees, Rule 12b-1 fees and other expenses are associated with Franklin Templeton mutual fund investments. These fees and expenses reduce investment returns. The funds are offered through prospectuses, which contain more detailed information about a fund's sales charges, expenses and risks. |
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| Professional management |
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| Instant diversification across multiple issuers and sectors |
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| Monthly income1 |
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| Automatic dividend reinvestment |
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| Daily liquidity at NAV |
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| Low initial investment |
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A word about risk
Municipal bonds are sensitive to interest rate movements, and a fund's yield and share price will fluctuate with market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in a fund adjust to a rise in interest rates, a fund's share price may decline.
In general, securities with longer maturities are more sensitive to interest rate changes. Funds with investments concentrated in a single state are subject to greater risks of adverse economic and regulatory changes in that state than a fund with broader geographical diversification.
A financial advisor can add perspective
If you have questions about investing in tax-free income funds, we encourage you to contact your financial advisor, who is best suited to help you make investment decisions based on your individual investment goals and risk tolerance.
Important Legal Information
Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Download a summary prospectus and/or prospectus, which contains this and other information. Please carefully read a prospectus before you invest or send money.
Footnotes
- Income dividends and share prices of bonds will vary with market conditions.
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