Mutual Funds Vs Bonds – Which One to Choose?

So, before you pick an investment option, here’s a quick guide that will help you understand the basics of a mutual fund and bond. Read it out:

What are bonds?

You already know that companies require funds to expand their operations. In a similar way, government and public companies also need funds for various exercises such as conducting social programs and building infrastructure. Since the funds required are far more in volume than what a bank can provide, they often issue bonds in the market. Bonds are similar to the loans which are provided by several investors to a company of government in order to raise funds. In lieu of the loaned amount, the borrower pays a certain amount of interest to the lender.

Thus, a bond can be defined as a fixed income representing a loan that is made to a borrower by an investor. It can simply be considered as an I.O.U. or an agreement between the lender and the borrower. The agreement includes all the details of the loan and its interest and payments.

Bonds should not be confused with the stocks as the later one offers ownership and not the interest in exchange for the borrowed sum.

What are mutual funds?

A mutual fund can be defined as a pooled investment vehicle in which the money of various investors is collected and then further used to buy stocks, bonds or even cash equivalents. Mutual fund forms one of the best investment choices as it offers the expertise of fund managers. An MF is always managed by experienced professionals known as fund managers. In addition, a mutual fund is a great choice to invest as it allows an investor to diversify his/her portfolio.

The performance of a mutual fund is analysed by summing up the performances of all the underlying assets. Based on this performance, the gains and losses are shared proportionally among all shareholders.

Mutual Bunds Vs Bonds

Here’s a table to help you understand the basic difference between bonds and mutual funds:

In Summary

Now, you are clear with the definition and working of mutual funds and bonds. It’s time to decide to pick the best investment option.

Choose a mutual fund if:

• you have a small amount of money to invest
• you have mild to moderate risk tolerance
• you are looking for short term investment (less than 5 years)
• you don’t have any investment know-how
• you wish to diversify your portfolio

Choose a bond if:

• you are not willing to risk your savings
• you have a good amount of money to invest
• you are willing to park your saving for a longer duration

you have a good knowledge about which bond to pick and how