Most investors make sure their portfolios include some bonds in order to manage their risks. The conventional wisdom – with which I generally agree – is that the fixed-income part of your portfolio becomes more important as you get closer to retirement.

Some people like to own individual bonds. This lets them know exactly what they have, what interest payments they’ll receive and what they’ll get when the bonds mature – and exactly when that will be.

But other investors prefer bond funds. Here are 10 reasons why I’m one of them.

No. 1: Bond funds are professionally managed.
     
Investing in bonds is more complex than most beginners understand. To do it right you have to devote a fair amount of time to understanding and dealing with call factors, bid-and-ask spreads, collateral and other intricacies. Professionals know how to safely navigate these issues. The rest of us probably don’t.

If you invest in a low-cost bond fund like those at Vanguard, you’ll have some of the best managers in the business working fulltime for you for 0.25 percent per year. That’s $2.50 a year per $1,000 you invest – about 21 cents a month, or less than a penny a day. If that’s not a bargain, I’ve never seen one.   
 
No. 2: Bond funds let you reduce the risk of default.

Buying a bond is the same as loaning money. And the biggest risk of making a loan is that the borrower won’t pay you back. Unless you have a very large amount of money, it’s hard to spread this risk over enough bond issuers to make it go away. But if you hold shares in a fund that owns hundreds of bonds, a few defaults won’t sink the ship. (Remember you’ve got those managers watching this on your behalf every business day.)

No. 3: Bond funds are financially efficient.  

To get the best price on an individual bond, you need to buy a “round lot,” typically 25 to 100 bonds. To properly diversify, you’d need $1 million or more. At Vanguard, you can buy bond funds for a minimum of $3,000 per fund. Our suggested monthly income portfolio gets you into four funds (Short-Term Investment Grade, GNMA, High-Yield Corporate and Long-Term Corporate Bond) for $12,000.

No. 4: Bond funds make it easy to get monthly income.

Individual bonds typically pay interest only twice a year. Bond funds receive interest payments constantly. If you own a fund, you can have monthly distributions sent to you for a highly predictable, smooth cash flow.

No. 5: Bond funds make it easy to reinvest.

If you don’t need income and want to let your interest payments build up, it’s very hard to reinvest in individual bonds. When getting the best prices require buying $25,000 or more at a time, how do you reinvest a $575 interest payment? Bond funds can immediately reinvest every distribution without a commission and at the best institutional price.

No. 6: Bond funds make it easy to rebalance.

You might think rebalancing means what you do among your equity funds. But it’s at least as important to maintain the right balance between the equity and fixed-income sides of your portfolio. This requires periodic rebalancing to keep your risk level in check.

That in turn requires that you buy and sell once in a while. This could become quite cumbersome with individual bonds, not to mention expensive. But with one or more bond funds, a phone call or a few clicks of your computer mouse will re-align your portfolio to your target allocations.

No. 7: Bond funds make it easy to invest and withdraw small amounts.

If you need only $500, you probably can’t get it by selling an individual bond denominated in units of $1,000. But bond funds make withdrawals in any amount easy. Some funds even give you a checkbook. Likewise it’s easy to invest new money, as little as $100 at a time.

No. 8: Bond funds give you some protection from rising interest rates.

When interest rates go up, existing bonds (and bond funds) almost always lose some of their principal value because their fixed interest payments suddenly are below the going rate. (You won’t lose this value if you hold the bond to maturity. But if you need to sell the bond in the interim, you may have to settle for less than you paid for it.)

In a bond fund portfolio, bonds are always maturing – and higher interest rates usually attract new money. These inflows are reinvested in new bonds that (if interest rates are rising) pay higher interest. Bond fund shareholders get the benefit of that in the form of gradually rising yields.

No. 9: Bond funds make record-keeping easy.

If you own a slew of individual bonds, you’ve got to keep track of income and capital gains and losses for tax purposes. Aside from this hassle, this may increase the fee you pay an accountant to do your taxes. And if you want to know what your bonds are worth on any given day, you may have to look up prices in the newspaper or online – or set up a spreadsheet to do it for you.

But if you own a bond fund, a few minutes online will tell you everything you need to know. A paper statement at the end of the year gives your accountant the relevant information all in one place.

No. 10: Bond funds make it easy to make tax maneuvers.

If you have a bond fund that’s worth less in December than you paid for it, you might want to sell and take the loss for tax purposes. You can reinvest the money immediately in a similar (but not identical) fund. Or wait 31 days and reinvest in the same fund.

It’s possible to do that with individual bonds, but it’s more cumbersome and more costly.

In summary, bond funds make total sense for most investors. They’re cheap, convenient and professionally managed. That combination is rare in today’s business world. When you find it, take it!