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I recently went through that drill -- sold several bond funds I had owned for a few years and moved everything into individual bonds. I had two motiviations and they were premised on the fact that I do not look at bonds as a potential source of capital gains but just a stable place to park money I may need in the next 3 - 4 years. These motivations were:
- to avoid the volatility of bond fund NAVs.
- to begin to build a bond ladder with retirement in mind in the not-too-distant future.

I personally went with municipal bonds (from my state) and US Treasuries. That way I was able to avoid state income tax (and, in the case of the munis, Federal as well). I don't know if I might have done a little better with corporates, but it was worth it to me to have a potentially slightly lower yield for a little more security. I bought the munis through my Fidelity Ultra Service Account (brokerage account.) I bought the Treasuries through a Treasury Direct account which I recently established. When you buy bonds from a broker you never really know how much commission you are paying because that is all factored into the price of the bond (the difference between the coupon and the yield to maturity.) The Treasury Direct approach means no commissions at all (although there is an account maintenance fee if your account is >$100K (which mine isn't).

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