Researching, tracking, and buying individual bonds can be a full-time job. Many investors choose mutual funds to make investing easier. Bond mutual funds are run by a professional manager who selects, buys, and sells the bonds in the fund. Individual investors can deposit or withdraw money at any time.

Where They Fit Best

Bond mutual funds fit especially well in accounts where there's a limited amount of money to invest or when you're making smaller regular deposits — such as through a payroll deduction as a monthly investment. Individual bonds are often priced to discourage purchases below a full $1,000 bond, making small deposits expensive. In fact, bonds are often not even available in increments smaller than $100 or $1,000. Mutual funds are sold in dollar-and-cent increments so it's easy to buy an odd amount or to make a smaller regular contribution.

Mutual funds don't pay their own taxes. Income earned by the fund is passed through — after expenses — to the investors, who must pay the required tax. The same applies for capital gains earnings. Funds are great for liquidity, but their pass-through taxation takes a little planning. Get in the habit of keeping accurate records and considering whether you want to own your fixed-income mutual fund in your retirement accounts to shelter the tax.

Passive Versus Active Management

There are two schools of thought when it comes to investment management. One, the passive school, believes that the market is the market and there's no way for an investment manager to consistently beat it. The other argues that a smart manager following an active management approach can figure a way to top competing managers and even the market itself. In fact, looking back over the years, many managers have topped the market fairly consistently. Unfortunately, only in hindsight is the view 20/20. Investors looking to buy bond mutual funds are faced with deciding which managers will be successful in the future, far harder than identifying the winners in years past. What's the best solution? Hedge your bets: do a little of both.

Sometimes Advice Pays

Any time you have an inefficient market — a market in which all the players don't necessarily have all the information at exactly the same time — there are opportunities for a good manager to add value to the investment by being clever enough to get good information early. This is the case especially with foreign bonds and high-yield bonds whose complexity rewards good research. If you've decided that you want these in your portfolio, then researching an actively managed mutual fund would be a good approach. For plain-vanilla, efficient-market investing — as with U.S. government bonds and high-quality corporate bonds — lower-cost passive investing will work just fine.

Stay on Top of the Trends

Bond mutual funds are not exactly the set-it-and-forget-it investment that many people think. Mutual fund managers must invest according to narrow rules established by their particular fund. For example, a short-term bond mutual fund must continue investing within its short-term bond limitation even when the economy is rewarding intermediate- or long-term bonds. Later, you'll hear more about selecting investments to achieve the right asset allocation, but for now just remember the importance of diversified bond mutual funds, including short-, intermediate- and long-term funds.