Before we can answer the question ?should you invest in individual bonds or bond mutual funds?, we have to first understand the purpose of owning bonds in your portfolio. Novice investors use bonds as an income generator, relying on yields to supplement living expenses during retirement. Institutional investors and competent advisors, on the other hand, view bonds as a tool to reduce portfolio volatility. Total return, not just bond yield, is what counts. If the purpose of holding bonds is to control portfolio risk, then owning bond funds, not individual bonds, is the appropriate choice. Individual bond shares are not cheap. A single corporate bond can cost you $10,000 or more. So, if a retiree with a million dollars decides to allocate 40% of his portfolio to bonds ($400,000), he would likely have to purchase at least forty different issues to achieve a somewhat divers fiat currency ified bond portfolio. The higher costs associated with acquiring individual bond issues may prevent many investors from sufficiently diversifying among different issues. In contrast, an initial investment in a bond fund might cost only $1,000 to $3,000 depending on if you purchase it in a retirement account or not. As a bond fund holder you can own stakes in dozens, perhaps hundreds, of bonds with one purchase. Let?s take for example the Vanguard Short Term Bond Index (VBISX). If you own an IRA, you can hold 642 distinct bond positions with a $1,000 investment in the fund?a far cry from the 40 issues we purchased in the previous example. Costs While individual bonds do not incur the ongoing management and operating expenses of bond funds, they do have associated expenses including brokerage commissions/fees and bid-ask spreads) that all investors should consider.