The task of putting away savings at the end of each month is just as tiring as it is exhilarating. The act of saving money, and the art of nurturing it are two very different skills - most of us, find ourselves struggling with the latter. The novice savers have the bandwidth to sustain the risks of investing in the market, but may lack the direction and the guidance, and before they know it - too little has been done with the money they put aside. Their older and wiser counterparts might have a slight edge but not enough of a shock absorber to weather out the storms in the market. Common investors find themselves deterred by technical jargon, complex equations and financial elitism, blunting the growth of their wealth - leaving them vulnerable to stagnation or worse - fraud.

So while our priority is to invest, and invest well - it cannot be done without familiarizing ourselves with common investment vehicles and instruments. In this article, we attempt to demystify two of the most common and popular financial instruments at our disposal - Mutual Funds and Bonds, and understand what either could mean for investors who aspire to not just save, but also cultivate their money in a free market in a way that brings them the largest crop in return.

OUTSIDE OF TV ADs, WHAT DO MUTUAL FUNDS REALLY MEAN?

The term "wealth diversification" comes in handy here, which essentially means that investors must be prudent about how they invest and not put all their eggs in the same basket - and here's where mutual funds become a choice. Mutual funds have enjoyed unprecedented popularity in the last decade or so - from being heavily advertised to being heavily invested in. For most investors who look for alternatives outside low risk fixed deposits, mutual funds seem to be the answer, so let's take a moment to decode what mutual funds are, and if they really do mutually benefit both the investor and the company.

What are Mutual Funds: Mutual Funds is an investor tool that allows an individual to invest in an array of securities such as shares, bonds and other assets, through an asset management company (companies who manage your fund). So in its essence, the transfer of funds from the investor to the investee, is not direct, as the transaction is being facilitated by another organization in the middle. After the investor's wealth valuation has ballooned and they want to redeem their mutual funds, the asset management company is also entitled to keep a portion of the investor's money as their own fee, for their services and managing their own expenses. Mutual Fund Houses can only invest an individual's money into assets that they want to - with specific instructions as to whether or not to invest in debt funds, etc. All in all, it is a lot like asking your more experienced investor friend to do the investing on your behalf, in exchange for a fee.

Types of Mutual Funds: Broadly there are three types of Mutual Funds that are open for investors to invest in -

• Equity Mutual Funds: These mutual funds invest in the equity shares of various companies. A mutual fund can be declared an equity mutual fund if around 65% of its portfolio is steeped in equity instruments. Typically they offer a high rate of return.
• Debt Mutual Funds: Debt mutual funds invest mostly in debt, money market and other fixed-income instruments such as treasury bills, government bonds, certificates of deposit, and other high-rated securities. A mutual fund is considered a debt fund if it invests a minimum of 65% of its portfolio in debt securities. Debt funds are ideal for risk-averse investors as the performance of debt funds is not influenced much by the market fluctuations - offering predictable returns. Eventually, the debt mutual funds may invest in bonds.
• Balanced or Hybrid Mutual Funds: These types of funds are typically a mix between both debt funds and equity funds, in a bid to balance out the risk to reward ratio and to diversify the portfolio, so it is exposed to both varieties of funds.

Each of the above further branch into subsections, which have not been mentioned in this article. The debt mutual funds are of interest to us for the comparison with bonds.

BONDS: UNCOVERING THE MYSTERY

Offering a stiff competition to Mutual Funds, are Bonds - another financial instrument that enjoys immense popularity in both India, and outside. Bonds have earned a reputation for being the go to choice for serious investors and high net worth individuals, however, the requisite to invest in a bond is not that high. In today's market, Bonds are just as viable as a mutual fund, maybe even more - given that they are fixed income securities that an investor can directly invest in, without any facilitator, and anyone with money to invest can invest in the bonds market.

What are Bonds: Like the rest of us, even big corporations and governments need loans to fund projects in their pipeline - leading them to issue bonds in the primary market, with hopes of raising the capital they need, banking on interested investors. In layman's terms - buying a bond is essentially directly lending money to a borrower, with a fixed rate of interest that is predetermined. Bonds are debt instruments through which the borrower is able to receive a loan from the market. Please note, that is not the same as purchasing stocks - through which, one is actually buying a stake in the ownership of the company.

Investors can invest in such debt securities directly, ensuring that the whole lumpsum amount goes directly to the borrowing. The lack of a middle man or facilitator also means that no portion will be deducted from the investment amount as a fee, letting the investor's money grow to its full potential and reaping the benefits. Bonds are also considered safer, because borrowers are bound by an iron clad contract that ensures that the loan (or the investor's money) is to be returned at a predetermined date. Investment in bonds can be done in both places - primary and secondary market.

Independent credit rating agencies like ICRA or Moody's rate bonds as per their performance and credit rating, to help investors make a sound choice. Bonds of the top quality usually have A, AA and AAA ratings. Investors will be interested to know that BondsKart showcases only premium quality bonds that rate between A to AAA on their platform, in a bid to eliminate all possibilities of rogue defaulters and junk bonds.

Types of Bonds (in India): The following is a brief list of the kind of bonds that are popular in India.

• Government Securities
• Capital Gain Bonds
• Corporate Bonds
• Sovereign Gold Bonds
• RBI Bonds
• Convertible Bonds
• Inflation Linked Bonds

BONDS VS DEBT MUTUAL FUNDS: WHICH SUPERHERO TO PLACE YOUR BETS ON?

So now that we have the raw deal on both of these market place heroes, how does one decide which to invest in? While the best way to make this decision would be to go to your financial advisor and work on a plan that is tailored and conducive to your personal finances, but we can make the dilemma easier for you, by listing out the core differences between the two.

BondKart still recommends visiting your financial advisor for a more thorough explanation and approach towards your personal finances.