Mutual Funds are investment vehicles though which you can park your funds in various financial instruments while Bonds are fixed income products.
In India, only 10% of the investors understand the difference between mutual funds and bonds. The rest of the investors consider all financial instruments as investment options.
Investors in India are a bit confused between Stocks vs Bonds vs Mutual Funds. In other words, we can say that investors do not understand the fundamental difference between Investments vs Savings.
Mutual Funds are investment vehicles through which we can park our money in different asset classes like Equity, Debt, Gold, Real Estate, Liquid Money Instruments, etc. Mutual Fund is a pool of money from investors which is managed by a professional fund manager.
Bonds are fixed-income instruments, in which an investor gets a consistent return on investment i.e. coupon rate on investments in bonds. Bonds in India are issued by Govt. or High Net Worth Companies to fund their projects like Road Construction, Other social welfare programs, etc.
Let’s discuss the difference between bonds and mutual funds in more detail, their types, and the benefits of investments.
Meaning of Bonds
Bonds are simply debt instruments, issued by companies or governments to the general public to raise funds for their ongoing projects. Under bonds, an investor gets a fixed interest. Each bond carries a coupon rate fixed by its issuer, which they are liable to pay to its investors.
Bonds are issued for a fixed time horizon, till that time expires, an investor gets fixed interest and after the tenure, the investor gets back his/her money.
When government or the companies issue bonds for the first time it is known as the primary bond market.
Further, these bonds can be traded in an open market known as a secondary bond market i.e. trading of bonds on a recognized stock exchange.
Type of Bonds
1. Government Securities Bonds
- These are the bonds that are issued by Central or State Governments to meet their liquidity needs.
- Here, Govt. of India is the issuer of bonds which are primarily for the long-term horizon ranging between 5-30 years.
- Fixed-rate Bonds, Floating rate Bonds, or Sovereign Gold Bonds all are types of Government Bonds and fall under the category of G-sec.
- When bonds are issued by the various Public or Private Corporations in India to meet their liquidity needs for various projects.
- Only corporates with a robust financial track record can issue bonds in India. All other corporates are not allowed to issue bonds to the general public.
3. Public Sector Bonds
- Public Sector Bonds are issued by the Public Sector Undertakings (PSUs) in India
- PSUs are those corporate bodies in which Central Government holds more than 51% stake.
- For eg. Bonds issued by Indian Oil, SBI Bank, BPCL, etc come under PSU Bonds
4. Sovereign Gold Bonds (SGBs)
- These bonds are Government Bonds denominated in Gold Grams.
- SGBs are the perfect substitute for holding physical gold, as here you get capital appreciation similar to physical gold and 2.5% p.a. interest as well on your investments.
Benefits of Investments in Bonds in India
- Consistent Returns
- Can be pledged or can be given as collaterals
- Safety of capital
- Safeguard against stock market volatility, as investors get fixed interest in bonds.
Mutual Funds on the other hand are the tools to invest in various asset classes. Here, Investors can mobilize the funds into different categories like Equity, Debt, Real Estate, Gold, etc. based on his/her risk profile.
Mutual funds are pooled investment funds where no. of investors put their money, against which they receive units of funds.
These are a little different from the stocks where an investor gets shares on their investments. Mutual fund units get their value derived from NAV which is similar to the share price in the stock market.
The company which operates a mutual fund is known as Asset Management Company, through which they manage pooled funds of investors. For each asset class, investments are managed through different schemes of investments like equity-oriented, debt oriented, balanced, etc. Each fund is managed by an experienced Fund Manager who is qualified enough to deal with bigger investments.
Mutual Funds in India are registered with SEBI i.e. Securities Exchange Board of India and drive their operations as per the rules laid down by SEBI.
To Read more about Basics of Mutual Fund.
Types of Mutual Funds
1. Equity Funds
- These funds invest their money in equity shares based on the market cap category of fund, either in large cap, Midcap, or Small cap shares.
- These funds are the best investment options for long-term horizon and wealth creation purposes.
2. Bond Funds
- These funds are debt-oriented funds, specifically designed to park money in various Bonds available for investments in India.
- These funds generate regular income for their investors to the tune of 6-8% p.a. These funds invest their money in various money market instruments, govt. securities or PSU bonds.
3. Hybrid Funds
- These funds invest in different asset classes like equity, debt, or other asset classes based upon the investment objective of the fund.
- These funds aim to maximize diversification and minimize risk.
Advantages of Investments in Mutual Funds:
- Multiple Investment options
- Easy transactional process
- Capital Appreciation
- Zero Commission in direct investments
- Disciplined way of investments through SIPs
- Expert Fund Managers
Bonds vs Mutual funds
|Nature||Investment vehicle to park money in various asset classes like Equity, Debt, Gold, Real estate, etc.||Particularly a debt instrument|
|Returns||Returns are comparatively higher, depending upon the type of schemes.||Investors get fixed returns with almost zero risk|
|Capital Appreciation||Investors can generate wealth by investing in equity oriented mutual funds through capital appreciation & regular dividend income.||Investors here do not get any capital appreciation.|
|Riskiness||More Risky as compared to Bonds.||Less Risky as compared to Equity Oriented Mutual Funds|
|Duration of Investment||Can be short term or long term||Majority Long Term|
Bonds, Mutual Funds, or Stocks all are financial instruments and generate different returns based upon the nature of the instruments & tenure of investments. Stocks generally offer higher returns with higher risk, Bonds offer safer returns with minimal risk, and on the other hand, Mutual Funds generate conservative returns with moderate risks.