Individual bonds vs a bond fund

If you buy individual bonds, you pay no management costs, and you can control your allocation precisely; a fund has a management fee, and has an allocation set by the manager. However, you will pay a commission to buy bonds, unless you buy Treasury bonds from Treasury Direct, and another commission to sell before maturity. Bond funds also have trading costs not reflected in their expenses, but the costs are likely to be very low. And the costs of the funds themselves can also be low; Vanguard's bond funds have expenses of about 0.2% for Investor shares and 0.1% for Admiral shares.

But the main advantages of bond funds are diversification and liquidity. A corporate-bond fund can be diversified; it is much harder for an individual investor to hold a diversified portfolio of corporate bonds. (Diversification is irrelevant for Treasuries, which have no credit risk.) You can buy and sell a bond fund in any amount, and reinvest interest payments in the fund; if you hold individual bonds, you can only sell a whole bond, and any interest received cannot be automatically reinvested unless it is enough to buy a new bond.

Control Over Maturity
When you buy bonds on your own, you decide what to buy. You can target longer or shorter maturity as you wish. If you have an obligation due on a certain date, you can buy bonds with maturity date matching closely to that date.

Lower Ongoing Costs
Once you purchased the bonds, there is no ongoing management fee, because effectively you have become the manager for your own bond portfolio.

Psychological Comfort
Some investors get psychological comfort in knowing unless the bonds default they will get the principal back at maturity ("never lose money"). Although the bonds' market prices fluctuate with interest rate changes, they choose to ignore the market prices in the interim.

Diversification
Diversification of bonds is particularly important if they come with credit risk.

Lower Transaction Costs
Costs are a concern if you need a diversified portfolio of corporate bonds for example, which would be prohibitively expensive to construct on your own.

Also, if you need bonds that are illiquid at the retail level, such as municipal bonds, a bond fund may offer a low-cost way to own them.

Convenience

 * Buy or sell at any time at any amount. When you invest in a bond fund, you can buy or sell additional shares at any time at any amount. There is usually no transaction fee for buying or selling additional shares. If you have a portfolio of individual bonds, additional purchases and sales on the secondary market may be subject to a commission and bid/ask spread. Purchases on the primary market are subject to availability and issuance schedule.
 * Reinvest distributions automatically. If you invest in a bond fund in an IRA or if you don't need income from your investment, distributions from a bond fund can be reinvested automatically. If you invest in a portfolio of individual bonds, you must reinvest the interest payments yourself because you cannot reinvest them back to the same bonds.
 * Easier tax handling (taxable accounts only). If you invest in a bond fund in a taxable account, you receive tax forms from the bond fund company. If you have a portfolio of individual bonds, you receive tax forms from TreasuryDirect or your brokerage account listing the tax-related items for each bond. It's easier to figure out the tax reporting for one bond fund versus many individual bonds.

Links

 * Taxable Bond Funds and Individual Bonds Vanguard Investment Counseling and Research
 * Municipal Bond Funds and Individual Bonds Vanguard Investment Counseling and Research