The differences between bonds and debt funds

You may be familiar with these terms if you’re used to investing. In order to make the most of each and to know the best one in your situation, you need to learn how they work and avoid all confusion.

Bonds

You can buy a bond from a municipality, a company, or a government. They’re debt obligations for which you’ll receive interest after your purchase. This happens because, if you have a bond, you own the debt security as well.

These payments will last for a certain period of time, which was arranged upon buying the bond. The time of finalization is called maturity and is the moment when you’ll collect the original amount of your purchase. This principal will be given back to you as long as you don’t sell the bond before its maturity date.

Usually, bonds are held until they mature. This is why their risks are low; you’ll receive your principal back even if the price of the bond fluctuated in the meantime. If you manage to keep it for the duration of the term, which can be between 3 and 30 years, you won’t have to worry about changes in the bond’s price.

Debt funds

These are bought from brokerage firms or mutual fund companies. As you’d be investing in many bonds through one company, the money you earn is actually a reflection of the combined average rates that were earned by the underlying bond holdings in the fund. In other words, you own a share of the fund and not the bonds themselves.

Here’s all you need to know about debt funds!

Unlike bonds, debt funds don’t have a maturity date. You can keep them for as long as you want, which has its advantages and disadvantages. On one side, it gives you more freedom to decide when to sell it. You can do it once you’ve met your investment goals.

On the flip side, you won’t receive the principal back when you decide to sell your debt fund. You can still make money if you do it when its price is higher than it was when you first purchased it, but you’ll lose money if it’s lower.

If any term here was unfamiliar or you want to learn more about them, check this article with 12 terms you need to know if you plan on investing!

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