Inexperienced investors should buy bond funds rather than bonds

BONDY ON MONEY

May 29, 1994|By SUSAN BONDY | SUSAN BONDY,Creators Syndicate

Q: I would like to invest in tax-exempt municipal bonds, but I'm a novice at investing. Should I buy individual bonds or tax-exempt bond funds?

A: I believe that bond funds are almost always better than individual bonds. Here are my reasons:

* Liquidity: It is simpler to buy and sell mutual fund shares than individual bonds. When buying individual bonds, you have to investigate each issue, its quality rating, the size of the issue and its tax-exempt status. With a bond fund, you know exactly what you are buying.

* Pricing: Selling mutual funds is, again, easy. You have one price per day, and if you own a no-load fund, the price to buy and the price to sell are the same.

Selling an individual bond is another story.

Although some people just buy bonds and hold them to maturity, with interest rates going up as they have been for the past few months, one should consider the possibility of selling, especially bonds of over 15 years to maturity.

The problems with selling any tax-exempt bonds are the work involved and the expense. To get a good price, you should shop around, and that means calling a number of different brokers. The expense is represented by the large spreads that sometimes exist between the "bid" price, the price to sell the bond, and the "asked" price, the price to buy. In most cases, these spreads are not available to the average investor. You may be taken to the cleaners and not even know it.

* Monitoring: With mutual funds, a daily price is either listed in the paper or available by calling your broker or the toll-free telephone number of the fund sponsor. The only way to price a tax-exempt is to call a broker and ask the broker to get a price.

* Diversification: Most brokers have a minimum investment requirement of $5,000 per municipal bond, so $5,000 gets you one issue, and $10,000 can get you two different issues. With a bond mutual fund, $1,000 to $2,500 can buy you a share in 50 to 200 different bonds.

* Single vs. triple tax-exempt: In most states, when you buy a bond issued in your own state, that bond is triple tax-exempt -- that is, exempt from federal, state and local taxes. The higher your state and local taxes, the more important this becomes. A number of mutual fund sponsorsoffer state-specific funds.

One last note: At this point, I feel interest rates will go higher. If this happens, bond prices will decline even further. Therefore, I recommend you choose the appropriate bond fund and monitor its price weekly. Chances are good you'll be able to buy it for less than today's price.

Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan in care of The Sun, 501 N. Calvert St., Baltimore, MD 21278. All letters will be treated confidentially.

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