Mutual Funds Vs Bonds – Which One to Choose?

Mutual Funds Vs Bonds – Which One to Choose?PolicybazaarAverage Rating / 5 ( reviews)
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When it comes to financial planning in the UAE, parking your money in a savings account is not a good choice. This is because the saving accounts may offer a fixed interest rate but, they fail to provide you with the financial security after retirement, they fail to help with the funding of your child’s education and they fail to contribute while buying a new property. The best investment choices are those that help you fetch high returns to accomplish your long term financial goals. Some of such investment options are mutual funds and bonds. Although these investment options are often associated with several risks, their high returns outweigh the risks associated; all that requires is a smart investment strategy.

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:

Characteristics Bonds Mutual funds

Issuer

Government and affiliated agencies, state and local governments and corporations

Banks and brokers

Ownership

Investors are not offered with any ownership. They are offered with interest on the loaned amount.

Investors do not directly hold a stock (or any other asset) but, they hold a proportion of it.

Trading

These are not traded in open markets.

These are traded in shares.

Inertest Rates 

Interest rates are fixed.

Interest rates depend on the performance of the asset in the market.

Price variation

Prices are calculated upon the maturity of a bond.

Prices are calculated daily at the end of trading.

Losses

Typically no losses are associated; investors receive fixed returns.

Losses may be incurred. However, the chances are minimal.

Duration

Matures after a long duration (minimum 5 years)

Can be short-termed as well as long-termed.

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

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