Bonds are the fixed-income debt instrument that amounts to a loan from an investor to a company, it includes details about terms, interest rates and payment rates. Companies or governments issue bonds when they want to raise money, finance new projects or maintain operations where each bond comes with the maturity date and terms for interest payments. The interest payment is referred to as the coupon that usually pays higher coupons due to the increased length of lending commitment. When the bond is trading for less than the face value, then it is said to be selling at discount and when the bond is trading for the price above face value then it is said to be trading at a premium. The price is generally set at par value when bonds are issued and as time passes, the fair value of the bonds will change. One must know that there is an inverse relationship between interest rates and bond prices i.e, when the interest rates increases, bond prices will decline and when the interest rates decrease, bond prices will rise. Characteristics of bonds are:-
- Interest Rate
- Tax Status
- Face value
Mutual Fund is an investment type where many investors pool their hard cash to gain returns on their capital. In simple words, the mutual fund is a type of financial vehicle that is made up of the money collected from many investors to invest in securities like bonds, stocks and other assets. They are operated by professional managers who allocate the fund’s assets and attempt to produce capital gains. Mutual Funds invests in various securities and their performance is tracked as the change in the total market of the fund. Mutual Funds have a dual nature i.e, they serve as an investment and an genuine establishment both. For example- if an investor buys the stock of Apple then he is buying the partial ownership of the company and its assets. Income is earned from dividends and capital gain from the mutual funds. Mutual Funds offers a variety of stock, bonds and other investments and can be bought and sold through a brokerage firm with a trading fee. Characteristics of mutual funds are as follows:-
- Low expenses
- Provides consistently good performance
- There are plenty of assets
Anyone planning for their child education, retirement and buying s house, parking their money in saving accounts is the best available option but there is one disadvantage of parking money in saving accounts i.e, it does not help you to fetch high returns. Hence, investing your money in stocks, bonds and mutual funds is the best. They all carry a high degree of risks but they are sure to offer huge returns over the long term.
Bonds v/s Mutual Funds
In both bonds and mutual funds, investors are not offered ownership but are given just the units of the scheme. If talking about returns and losses then in bonds investors are provided with fixed returns with no risk involved and they receive their returns without any losses but in mutual funds, investors fetch high returns with minimal risks involved and they could sometimes have to face some minimal losses. The duration of bonds is mostly long-term (say, 5 years) but the duration of mutual funds could be short or long. In bonds, the principal amount and interest are fixed whereas in mutual funds interest rates are not fixed, it depends on the performance of the market (say, if the market performs well, the divident paid would be high).
Yes, in my opinion investing in bonds is better than that of mutual funds as bonds are generally less risky and investors are wise enough to understand that bond value could fluctuate. Bonds are considered safe than any other investment option as the bonds with a longer period of maturity offers higher rates of return. One more benefit of bonds is that you can never lose your money in bonds as the rate of interest can never go below zero hence, the redemption value of the bonds can never decline. What an investor needs to do is just a suitable bond fund to invest in.