Investing your hard earned cash is a very important decision that can only be made after several factors have been put into consideration. Investing in mutual funds and bond is considered to be one of the most favorite practices among the global population. Each of them has its own benefits, but can you guess which search type will be more effective for you? This guide will enable you to know the differences between mutual funds and bonds, potential drawbacks and advantages between the two of them.
What Are Mutual Funds?
Mutual funds combines, funds of many people to invest in a group of securities such as stocks, bonds or anything which is legal. Hence mutual funds incorporated by professional fund managers as they tend to offer higher returns within the invested amount although risk is diversified across various forms of investment.
Types of Mutual Funds:
Equity Funds: In its investment, it should majorly invest in stocks.
Debt Funds: Emphasis should be made on fixed-income obligations such as bonds and notes.
Balanced Funds: Burst the balance risk and return by diversifying stock investment by bonds.
Index Funds: Monitors certain kinds of markets indices.
Benefits of Mutual Funds:
Diversification: Another way of hedging risk is through diversification where an individual invests in different kinds of stocks.
Professional Management: Fund managers take decision on your behalf with professional and skillful management on investment.
Liquidity: It is quite flexible regarding its purchase and sale since most of the funds have high daily redeem ability.
Potential for High Returns: Particularly with equity funds or while having higher risk associated to it.
What Are Bonds?
Bonds are debt instruments through which you act as a banker, providing funds to a borrower, in return for periodic interest income and return of your principal at specified time.
Types of Bonds:
Government Bonds: Which are issued by the governments and are classified as less risk.
Corporate Bonds: These are announced to the public by the companies; they are very risky but can provide more profits.
Municipal Bonds: They are local government bonds; commonly exempt from local taxation.
Benefits of Bonds:
Stability: It also pays fixed or regular interest rate that makes the repayment of the interest inflow possible.
Lower Risk: Usually safer to own compared equities, stock and equity based mutual funds.
Preservation of Capital: It has been mentioned that principal is usually repaid at the end of the loan or at the end of loan tenure.
Predictable Returns: Interest rates which are normally set means expected returns can be easily forecasted.
Mutual Funds vs. Bonds: Explanatory Differences
Risk and Return:
Mutual Funds: They have higher potential returns than other mutual funds but they also have greater risks that is especially so with equity funds.
Bonds: It entails lower risk since value is more predictable and has steady rates of returns.
Liquidity:
Mutual Funds: Highly liquid, very easy to sell or to buy.
Bonds: It can be liquid but can attract heavy penalties when you withdraw from it before the agreed time.
Investment Horizon:
Mutual Funds: It can be used as short-term and long-term investment depending on the type of fund available.
Bonds: More beneficial in case of financial investment done for a longer period more specially in government securities.
Tax Implications:
Mutual Funds: Such that Equity funds, which have been held for over a year, are subjected to the long term capital gains tax regime, which is cheaper.
Bonds: Interest earned is one the factors that is subject to taxation, although bonds such as, municipal bonds does not attract taxes.
Where Should You Invest?
Mutual Funds: This investment option is ideal if you intend to get higher returns with an added risk factor. Setting it as appropriate for the novice investor and the strategic investor wishing to build long-term investment wealth.
Bonds: Most suitable for risk averse investor who aims to keep their invested capital safe from volatile and unpredictable swings in the market. Ideal to those who are close to retirement age or people who desire fixed Income.
Mutual funds and bonds are two of the investment options that investors can consider and the decision to invest between the two depends on several factors which include though not limited to the following; Therefore, if you are in search of growth capacity and can spare time for extreme ups and downs then mutual funds could be a preferable choice. Though, if you are inclined to safety and moderate income, which bonds may provide.
It is therefore recommended that the investors seek the services of a financial expert so as to design a portfolio depending on their needs.
Last modified: September 11, 2024