When you buy a bond mutual fund, you have no control over the buying and selling of the bonds, so you can have gains and losses for which you did not plan. When you buy an individual bond, you lose diversification but gain control over the timing of capital gains and losses. It is important to remember that one bond is not diversified. A mutual fund portfolio is diversified. For most investors with limited capital, mutual funds will provide some needed diversification. A key factor in the investment return of a bond fund is its expense ratio (the percentage of fund assets used to pay fund expenses). Look for bond mutual funds with an expense ratio of 1% or lower.
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