Saying that it is not cost-effective to buy less than $5,000 worth of Treasury or corporate bonds or less than $10,000 worth of municipals, a new Charles Schwab report recommends bond funds over individual bonds for most investors.

In order to build a diversified portfolio of at least 10 different issues, an investor would need a basket of $50,000 of corporate bonds and $100,000 of municipals. By comparison, an investor automatically receives diversification and professional management by buying a bond fund, according to Schwab. However, for investors who want the certainty of a fixed level of income and who prefer a defined maturity date, individual bonds may be a better choice, according to the report.

Meanwhile, Lipper has issued a report warning investors against what it sees as drawbacks in closed-end fixed income funds. Since the Federal Reserve began cutting interest rates in January 2001, initial public offerings of these types of instruments have raised $38.6 billion. Because many of these funds are leveraged, according to Lipper, their yields and their premiums to net asset value are both likely to drop as interest rates inevitably rise from their current 40-year lows. " As in any other type of investing, leverage exaggerates underlying results, which creates pleasant returns in favorable climates, but results in uncomfortable losses in adverse periods," according to the Lipper report.

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