Bonds, fixed deposits, debt mutual funds: Understanding the difference between fixed income options

Fixed income options can be suitable for risk-averse investors seeking a relative stable investment option although with modest return potential. These options include bonds, fixed deposits (FDs), and debt mutual funds. While all three options offer fixed income, they differ in terms of features, risks, and returns. In this article, we will explore the differences between bonds, FDs, and debt mutual funds and provide guidance on choosing the most suitable fixed income option for your investment goals.

• Table of contents

1. Features of bonds
2. Features of fixed deposits
3. Features of debt mutual funds
4. How to choose the right fixed income options?
5. Bajaj Finserv AMC

Features of bonds

Bonds are debt instruments issued by governments or corporations to raise capital. When investors purchase bonds, they essentially lend money to the issuer for a fixed period. In exchange, the issuer promises to repay the principal amount along with interest at maturity. Some key features of bonds include:

• Fixed income: Bonds offer a fixed or variable rate of interest and payouts in the form of coupons.
• Credit risk: The creditworthiness of the issuer determines the stability of the bond. Investors may lose their principal if the issuer defaults on the bond. Government issued bonds are considered the most trustworthy as there is zero credit risk.
• Liquidity: Bonds can be traded on the secondary market, providing liquidity to investors.
• Diversification: Provides investors with exposure to different issuers, sectors, and maturities.
• Maturity: Bonds have a fixed maturity period ranging from a few years to several decades allowing investors to choose according to their specific requirements.

Features of fixed deposits

If we look at bond vs FD, Fixed deposits (FDs) are time deposits offered by banks and financial institutions. When investors deposit money in an FD, they earn a fixed rate of interest for a fixed period. Some key features of FDs include:

• Fixed income: FDs offer a fixed rate of interest, making them a relatively stable investment option.
• Risk: FDs are considered among the most stable fixed-income options as they are backed by the bank's reputation and government guarantees for a certain investment limit.
• Liquidity: FDs offer limited liquidity as premature withdrawals may attract a penalty.
• Maturity: FDs have a fixed maturity period ranging from a few months to several years.
• Easy accessibility: Fixed Deposits are readily offered by banks and NBFCs in India.

Features of debt mutual funds

Debt mutual funds are investment vehicles that invest in fixed income securities such as bonds, government securities, and commercial papers. They offer diversification and professional management to investors. Some key features of debt mutual funds include:

• Professional management: Investors can potentially benefit from the expertise of fund managers and their understanding of the debt markets.
• Liquidity: Debt mutual funds offer high liquidity as they can be redeemed at any time.
• Diversification: Debt mutual funds offer diversification by investing in a diverse portfolio of fixed income securities.
• Variable income: Debt mutual funds offer variable return potential depending on the underlying securities' performance.
• Credit risk: Debt mutual funds are subject to credit risk as they invest in debt securities issued by various entities of varying creditworthiness.
• Interest rate risk: Fluctuations in interest rates can affect the NAV and performance of debt funds.

How to choose the right fixed income options?

Choosing the right fixed income option among bond vs FD vs mutual fund depends on various factors, including investment goals, risk tolerance, and investment horizon. Each option offers unique benefits and considerations. Therefore, investors should carefully evaluate the features of each investment option and diversify their portfolios to achieve their investment objectives effectively. Consulting with a financial advisor can also provide personalised guidance based on individual circumstances and preferences.

Bajaj Finserv AMC

For example, the Bajaj Finserv Asset Management Company offers various debt mutual fund schemes like the Bajaj Finserv Liquid Fund, Money Market Fund, Overnight Fund, and Bajaj Finserv Banking & PSU Fund.

Conclusion

Bonds, FDs, and debt mutual funds are popular fixed income options that offer a relatively stable return potential. While they differ in terms of features, risks, and returns, they can each play a crucial role in a well-diversified investment portfolio. By understanding the differences between these fixed income options, investors can make informed decisions and potentially achieve their investment goals.

FAQs:

What is the difference between bonds and FDs?

Bonds are debt instruments issued by governments or corporations, while FDs are time deposits offered by banks and financial institutions. Bonds may offer a fixed or variable rate of interest and are subject to credit risk, while FDs offer a fixed rate of interest and are considered safe.

Are debt mutual funds riskier than bonds and FDs?

Debt mutual funds are subject to credit risk, market risk and other types of risks as they invest in debt securities issued by various entities. However, they offer diversification and professional management, which can mitigate some of the risks.

Can I invest in a debt mutual fund for a short-term period?

Yes, there are short-term debt mutual funds available that can be suitable for short-term investments. These funds invest in short-term debt securities and offer a relatively lower return potential compared to long-term debt mutual funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.