What is a bond and what is a mutual fund?

Question

Could you please educate me on the basics, the PROS and the CONS, that I would need to know about a bond and a mutual fund, if i intend on investing in either one of them? Thanks!

Answer 1

Bonds vs mutual funds.

A bond is debt. When a government or a company needs more money, they issue a bond and borrow it from the public. If they borrow $10,000 for 10 years, then they will pay interest for 10 years and then pay the full $10,000 at the end of the loan/bond.

A mutual fund is a way to diversify your investments. An expert will oversee the holdings in the mutual fund (combination of stocks and/or bonds). There are funds that have all bonds.

Over the last 50 years, stocks have returned (average) 8% per year and bonds have returned 6%. Cash accounts have returned 5%.

Depending on how long you want to invest your money and your risk tolerance would determine which investment is right for you.

I would not recommend a bond by itself. If anything happened to the company or government that you did not foresee, your investment could disappear.

Answer 2

There is no "quick" answer for this. You need to read a couple of good books on Investing &/or Retirement Investing.
Anything less would be a disservice to you.

Now for the quick explanation;
A Bond is a loan (by you) to a Govenment entity or a business with a specific term and clause on interest payments.

A Mutual Fund can have stocks, bonds, reits, ETF's etc in it.
There are many Mutual Funds that just have bonds in them.

A Mutual Fund with Bonds vs. an individual bond. One bond can be effected by general interest rates (value of the bond). There may be more risk in buying one bond vs. a mutual fund that has many. It's generally cheaper to buy bonds than a Mutual Fund (IF: We're talking about large sums of money).

Best Bond Funds: Vanguard Mutual Funds (low expenses), Harbor Mutual Funds..... and a few others.

READ READ READ..... that's the best answer to your question.

Answer 3

A bond is considered a "debt instrument." It's like a loan, except it's a loan that's broken into a lot of small pieces and sold to investors.

A mutual fund is a group (or pool) of managed investments. These investments can be stocks, they can be bonds (loans) or, basically, almost any type of financial instrument (or a combination of investment instruments - i.e., part bonds and part stocks). This pool is subdivided into pieces and sold to investors. When you buy a mutual fund share, you are buying a piece of the entire pool of investments and the value of your share will vary with the value of the investments in the pool.

Before you decide to invest in anything, do a lot more research (search the web, go to the library, take a class, etc). People often lose money when they invest in things that they do not fully understand.

Answer 4

Hi Rohit,
Very simply a bond is loan you make to the government or corporations. The rate of interest you get on this investment
is based on the credit worthiness of the institution borrowing the money. Bonds are rated A+, A, A-, B+, B etc. Large well established institutions A+ and offer a lower interest rate because their is less risk of them defaulting. Investing in Bonds from San Francisco City is a whole lot riskier and they may be rated as C bonds. You would expect to get
a higher interest rate because you took a greater risk.
The City of San Francisco could default on your bonds
and you would lose upto everything. Market conditions
also affect the value of your bond. When interest rates increase bond funds often go up in value and stocks go down. I don't like bonds because I get much better returns
from no load mutual stock funds investing in 4 categories
Growth, Growth and income, International, and Aggressive
Growth. But 1/4 of your investment in each category.
Advantages: Diversifacation, managed portifolios.
To help you choose your funds consider Fidelity or Vanguard. Helpful reach tool= Yahoo Finance Mutual Funds. Getting 4&5 star Morningstar rated funds is very wise. For a complete understanding how to get your finances in order, living below your means, saving money,establishing an emergency fund, paying off all credit cards (Debt snowball), investing 15% of take home pay
in retirement account (Roth 40lK, Roth Ira, 401K, Ira,
company match, ) understanding life insurance and the
value of choosing 10 to 20 year fixed term insurance,
saving for college for your kids (529 programs), buying a
house and getting a fixed interest rate and never for more than 15 years and paying it off early, and much more
check out www.daveramsey.com or get the library to get
for you his newest book "The Total Money Makeover."
If you want to find a dependable program that works for everybody who will do it this is it. He also has a national
radio call-in show on weekdays 2pm to 5pm Eastern time.
And an excellent small group class that meets weekly for 13 weeks called Financial Peace University. It costs nearly $100. In 5 years I have gone from $60,000 in debt
to assets now approaching half a million. This is not a get rich quick program. Knowledge is 10%. Diligence in working the plan is 90%. Dave also has a one day seminar
specifically about investing in mutual funds. It was about 5 hours long and cost $75. I would recommend reading the book or going through Financial peace University.
I have never heard of anybody who tried this program and
did not wonderfully succeed. Best Regards!

Answer 5

A bond is a debt instrument issued by a Company or by a Sovereign Government undetaking to pay back the Principal you leave with them at a future date. For trusting them they also undertake to pay you interest on your investment called the Coupon rate either quarterly, semiannually or annually. Government bonds are issued by the Treassury of the Government and is called Sovereign Debt Instruments. Bonds issued by companies are called Corporate Bonds.
Mutual funds have their origin in the 50's. It is an idea that sprouted in the mind of Robert Tsai a Chinese immigrant of US then. Markovitz was inventing the risk and return theory of Investments then. Those days investor thought of only single stock investments and Markovitz theory brought out the advantages of investing in Portfolios which reduced the risk of investments. Robert Tsai thought it a good idea to pool in different investors wealth in the 60's and invest in a portfolio of stock whose returns are not correlated and get a better return ultimately which beats the market return. He floated a fund which was well subscribed by the Investing public and the first Mutual fund came into existence. It is investing a pooled in fund in different stocks and getting a combined return. According to the different types of stocks you invest you can have different types of mutual funds. Like growth funds which invests only in stocks that grow at certain pace every year. Value funds, debt funds which specialiases in debt instruments or bonds, hybrid funds which invests in stock, bonds and cash etc;. The investor is assured a stipulated return. The funds can be open ended meaning they can be traded in stock exchanges. Close ended meaning they cannot be traded in exchanges or cannot add new investors. Loaded meand they can collect a fee called load for meeting the expenses of investments and no load means no fees are charged for investing expenses. Closed ended funds invest in Real estate, metals, stocks, bonds their combinations etc;. These funds are privately placed to wealthy investors.
Bonds are safer because they are secured against of the Company or the promise of the Sovereign Government. Mutual funds don't have that gurantee of security that your investment will be safe. Only that it is managed by professionals.