Both mutual funds and fixed income investments like Corporate FDs and bonds offer you a healthy return on investments. What should one go for depends entirely on how they want to channelize their money and what do they expect in return of the money they put in. This article looks at the elementary difference between mutual funds and fixed income investments for a first-time investor.
What are Mutual Funds?
A mutual fund involves pooling of money from different investors, put together to purchase securities for the firm. It can be of four types – money market funds, fixed income funds, equity funds, and hybrid funds. Many people often confuse between bonds and bond fund. Here is an article by Forbes to help you understand the underlying differences and the nuances of investing in each.
As an investor, a portion of your money will go as an expense to purchase the fund, which can include the salary of the money manager who will oversee the monetary transactions.
Why mutual fund?
- The very first advantage of a mutual fund is that it is diversified. Your money is channelized in different manners, which always keeps the opportunity of earning more open, unlike in fixed income.
- Mutual funds are highly liquid investments, which means you can trade them whenever you deem fit.
- The amount needed to invest in a mutual fund is very nominal. It is a great way to simply start investing via a SIP without worrying about getting huge amounts locked away.
What are fixed-income investments?
Fixed income investments pay you a return on a fixed schedule and at a fixed rate. They can come in various forms, but the most common are corporate fixed deposits, and corporate, government and treasury bonds.
Why fixed income investments?
- The interest payment being periodic, they provide a fixed source of income for anyone looking for an additional source of regular money other than their day job. As an investor, you can expect fixed payments from these investments, which will help you plan your expenses better.
- Diversification of funds is an option here as well, just like mutual funds.
- One of the major advantages of fixed income investments like bonds and certificates of deposits is that your money is protected from loss. You know exactly how much you are supposed to get back at the end of the maturity period, and you get that amount irrespective of the stock market performance.
Which one to pick?
Looking at the investment horizon and objectives behind the two types of investments, a risk-averse investor could do well to have a balanced mix of both. Keeping both in an investment portfolio help stay away from the stock market fluctuations and yet earn decent returns that can be above the traditional bank FD rates.