You will be able to pick between a fund and a direct holding based on the goal and the sum involved.
Arjun has two jobs for his lower-risk money. One is his wedding in two years, with about S$25,000 to pay to the banquet venue and others on known dates. The other is the bond part of his long-term investments, which he will not touch for twenty years or more. His friend says to put both into the same bond fund, because "bonds are bonds". After lesson 7.1, A bond fund never matures, and that changes everything, Arjun suspects the two jobs need different tools.
A single bond, T-bill, SSB or fixed deposit has a property a fund does not: it returns a known amount on a known date. If the issuer pays, a T-bill maturing next March gives you its face value next March, whatever interest rates do in between. An SSB can be redeemed at face value in any month. A fixed deposit returns its principal and interest on the maturity date.
That is exactly what a fixed expense needs. Arjun's wedding payments have dates and amounts. If he holds instruments that mature just before each payment, he knows the money will be there in full. A bond fund cannot promise that. As lesson 7.1 showed, it has no maturity, so a rise in yields just before the wedding could leave him short with no date on which the price must recover.
For money with a date, then, direct holdings are usually the better fit. Government instruments such as T-bills, SSBs and SGS bonds, and insured fixed deposits, also keep credit risk to a minimum, so the only things to manage are timing and rate.
Direct holdings have a weakness when it comes to company bonds. Most people can only buy a handful.
Here is a made-up example. Suppose Arjun put S$50,000 into five retail corporate bonds, S$10,000 each. One of the five issuers defaults and bondholders recover 40% of face value, as in the queue from lesson 6.1, What happens when a borrower cannot pay. He loses S$6,000 on that bond, which is 12% of his S$50,000. Several years of the extra yield those bonds paid over government bonds would be needed to make it up.
Now suppose he put the same S$50,000 into a fund holding bonds from 300 issuers in roughly equal amounts. The same default, with the same 40% recovery, costs the fund about 0.2% of its value. The fund still bears credit risk, but no single failure can do much damage.
You cannot build that spread yourself with a few retail bonds. Many corporate bonds are not sold to retail investors at all, as lesson 1.3, Who borrows: governments, banks and companies, explained, and those that are come in minimum amounts that limit how many you can hold. A fund, at the cost of its fees, does the spreading for you.
For money you do not need for many years, a fund's lack of a maturity date matters much less. You will hold it through many rate cycles, and over a holding period well beyond the fund's duration, the extra income from higher yields tends to make up for price falls, as the rough rule in lesson 7.1 described.
A fund also takes care of the dull work. It reinvests coupons, replaces bonds as they mature, and keeps a steady duration and credit mix, so you never have to roll over a dozen holdings. For the bond part of a long-term portfolio, that convenience is worth a lot, and the spread across issuers is worth even more.
How much of a long-term portfolio should be in bonds, and how to combine a bond fund with share funds, is a separate decision. It is covered in Build and run an ETF portfolio. This course stops at choosing the right tool for each pot.
For the wedding, Arjun chooses direct holdings: T-bills and fixed deposits maturing a few weeks before each payment, with a slice in an SSB for flexibility. The amounts and dates are known, and he wants them met in full.
For the long-term bond part of his investments, he chooses a fund. He has no date to meet, he wants credit risk spread widely, and he has no wish to manage maturities for twenty years.
The pattern generalises. A fixed date and a fixed sum point towards direct holdings that mature in time. A long or open-ended horizon, especially where company bonds are involved, points towards a fund. Pick two goals of your own, one with a date and one without, and decide which route fits each one.
For two of your own goals, one with a fixed date and one open-ended, write whether a fund or direct holding fits and why.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).