If you are planning for retirement, child’s education or buying a house, parking your money in a savings account may do you little good. It definitely offers low risk and fixed interest but it may not help you in fetching high returns which are required to accomplish your long-term financial goals. Therefore, you can consider investing in mutual funds, bonds, and stocks. They do come with risks but over a long-term, they offer huge returns on your investment.
Before you decide to invest in any one of the above, you need to understand what mutual funds, bonds and stocks are. Hence, we will in the below, explain all these types of investments and also do a comparison between mutual funds and bonds.
What is a Bond?
Just like companies require funds to expand their operations, the government too requires funds for various things like social programs, infrastructure building, etc. For a private company as well as a government organization, the funds required are usually far more in volume than what a bank can provide. Hence, they issue bonds in the public market to raise funds. Therefore, a bond is similar to a loan which thousands of investors give to a company which is in need of capital. In other words, a bond is a debt instrument which a company or the government issues in order to raise capital where the investor is the lender and the company issuing the bond is the borrower.
When an investor purchases a bond, they are lending their money to the company or the government. In return for the money lent, the issuer of the bond will pay a certain amount of interest on the money, which will be returned to the investor at a specified date in the future.
Stocks, on the other hand, do not offer interest but offer ownership in exchange for the borrowed sum. Companies that issue stocks are giving investors the chance to own a part of the company in return for cash. Stocks are issued primarily for 2 reasons - to raise capital and to compensate the early investors and owners. Companies prefer selling a part of their stocks rather than take a loan and be in debt.
Characteristics of a Bond
Following are some of the characteristics of a bond.
- The Face value of the bond is the amount which the bond will be worth upon reaching maturity and also the amount on which the bond issued will calculate interest.
- Coupon rate is the rate of interest which the issuer will pay, based on the face value of the bond.
- The dates on which the issuer will pay the interest are known as Coupon dates which will also be mentioned on the bond.
- The date on which the bond will mature is known as the maturity date. On this date, the issuer will pay the face value of the bond to the bondholder.
- The original price at which the issuer has sold the bond is known as the Issue Price.
- Bonds can be traded (sold and purchased) in the open market, similar to stocks.
A Mutual Fund (MF) is an investment tool that invests in stocks, bonds, or cash equivalents. A large sum of money is consolidated and invested in varied securities like shares, bonds, and other assets. Mutual Funds are managed by experienced professionals known as a fund managers. Mutual funds not only provide you with fund management expertise but also allow you to diversify your portfolio in order to meet your financial goals.
Mutual funds give an opportunity to small or independent investors to access professionally managed portfolios consisting of bonds, equities, and other securities. The gains and losses of the fund are shared proportionally among all shareholders. The performance of an MF is derived by summing up the performance of the underlying assets.
All MFs are registered with the Securities and Exchange Board of India (SEBI) which also acts as a regulator of these funds.
Mutual Funds Vs Bonds
|Ownership||Investors do not own a stake but units of a scheme.||Similar to mutual funds, investors are not offered ownership in a firm.|
|Returns||Fetch high returns and comes with minimal risks.||Investors will be provided with fixed returns. There are no risks involved.|
|Losses||Investors may sometimes suffer losses but it will be minimal.||Investors receive fixed returns without any losses.|
|Duration||Duration can be short-term or long-term.||Duration is mostly long-term (more than 5 years).|
|Interest||Interest rates are not fixed. If markets perform well, the dividends will be high.||The principal amount and interest are fixed.|
All these 3 types of investment schemes - bonds, mutual funds, and stocks offer varied returns. Bonds offer safe returns, stocks offer high returns, and mutual funds offer moderate returns.
GST rate of 18% applicable for all financial services effective July 1, 2017.