If you own individual bonds and time your purchases to moments when bond fund managers are in panic selling mode, all you will lose is the premium as rates rise. You will lose this premium in any case as the bond approaches maturity. We are approaching a long overdue moment when yields become attractive as bond fund managers begin their liquidation. CEFs will also sell-off to levels well below asset value. Investor should be focused on two thing when investing in bonds:
1- Fixed coupon payments
2- Return of capital
This is not that different from buying CDs. Investors should then ask themselves whether they would buy a fund that invests in CDs with no guarantee of return of capital or buy individual CDs themselves? Passive bond funds will not shield you from market risk and consistently underperform a portfolio of individual bonds due to their tendency to buy high and sell low. For example, the funds that bought Apple 1.25% coupon 2030 notes at or over par are watching it trade at 90 cents on the dollar and could very well drop to a low of 70 cents on the dollar during moments of panic bond selling as rates rise. Passive bond funds sell their lowest yielding investments first. Active funds and individual bond investors avoid these bonds/notes causing precipitous drops until the yield to maturity becomes attractive again.
https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C925719&symbol=AAPL5030516
A fund that sells this note today will realize loss whereas an individual bond investor can buy today and hold it to maturity and earn the 1.25% coupon plus the capital gain at maturity and effectively earn 2.5% yield to maturity (YTM). If this Apple note were to trade down to 70 cents on the dollar, the YTM would be 6%. Over the past 18 months, the bond market has been flooded with issues like these so it will get very ugly for bond funds as rates rise but set up one of the best buying opportunities for individual bond investors.