Bonds | Debt Mutual Funds | |
Definition | Bonds are debt instruments that companies or government institutions issue for a specific duration and are issued in fixed denomination called face value. The main purpose of issuing bonds is to raise money. | Debt funds are mutual funds that invest a significant amount of their assets in debt securities. For example, corporate bonds, debentures, government securities, and money market instruments. |
Returns | Bonds are fixed-income instruments which pays fixed interest (coupon) rate, the bondholders receive regular income in the form of interest payments with the return of principle at maturity. AA rating bonds gave effective annual yield of around 9.5% with 3 years investment horizon | Debt mutual funds are not exactly fixed income instruments. They do however invest in fixed income instruments. Returns vary depending on the market price of the underlying assets. Top 10 Debt MFs gave an average annual return of around 7.5% with 3 years investment horizon |
Liquidity | After the bond issue, the bonds trade in the secondary market just like shares. However, the volumes are often low, making them a less liquid option. | Debt mutual funds are highly liquid, and you can exit your investments anytime. However, it is important to consider the exit load charges and tax implications. |
Risk | There are various risk of holding bonds like Default Risk, Credit rating Risk, interest rate Risk, inflation Risk, Reinvestment Risk, Low liquidity risk | Mutual funds are volatile investment options. Though stock market fluctuations do not directly impact debt funds, the interest rates and their movements have an impact on debt mutual funds. |
Portfolio Management | The investor is responsible for choosing, buying and selling the bonds. | Debt mutual funds are managed by professional fund managers who take strategic decisions to generate significant returns for the investors. |
Expense | No additional expense for investing in bonds. | Mutual funds are professionally managed; hence the fund house charges a certain fee for its service. |
Accessibility | Bonds are not easily accessible. You can buy bonds over the counter, thus making it often difficult for retail investors to invest. | You can buy and sell debt mutual funds easily. You can buy it directly from the AMC or through distributors. |
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