Bonds are debt instruments issued by a company or any other organization to raise capital.
On the other hand, Bond funds are mutual funds that invest in bonds. Simply, they are a basket of debt funds that hold securities of individuals.
The prime factor that differentiates bond funds from bonds is that bond funds consist of a bunch of multiple bonds.
Let us understand the key points that bifurcate bonds and bond funds:
Bond Funds | Bonds |
Portfolio of multiple bonds | Solo security |
The principal amount of bond declines if the price of the bond declines | No loss if the principal amount is held till its maturity date |
Highly associated with market and interest rate risks | Risk exposure is less |
Bond funds work well when interest rate expected to decline | Bonds work well when interest rates are expected to rise |
Hence bond funds are like mutual funds or exchange-traded funds and bonds are simply issued debts
Bond funds are riskier than bonds i.e. under bonds you can decide to hold your bond until it matures, receive periodic payments and in the end receive the entire principal amount
On the other hand, bond funds are exposed to more interest rate risks since they are completely exposed to the possibility of falling prices with the basket of bond holdings. An investor may enjoy the rising prices of the basket of bond holdings.
Many investors combine bond funds with bonds to hedge against economic uncertainty. This diversifies the investor’s portfolio and creates more opportunities
For risk-averse investors, solo bonds are the safest option. Bond funds could be a better option if an investor is looking to maximize his return from investments in the market at the interest rate falling period but risk exposure is greater compared to solo bonds.
Before investing it is very crucial to understand the objectives behind investing as well as identify your risk tolerance.
Bondskart has a team of experts that guides you through investment decisions.
Reference used: https://www.investopedia.com/terms/b/bondfund.asp
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