I am an active investor and a trader as well. Something I wanted to discuss from long was a difference between different investing instruments. So, here I'll highlight Mutual Funds v/s Stocks v/s Bonds in specific.
Financial Instruments: Types
In the multi facade market, we trade in all kind of commodity and financial instruments. So a few commonly traded financial instrument are stocks, bonds, debentures, currency, etc.
Here I'll discuss the major difference between 3 popular investment alternatives: Mutual Fund v/s Stocks v/s Bonds.
Before jumping into the difference analysis, let's first understand the meaning and features of these three.
What are Stocks?
Stocks or more commonly called "shares" or “equity" are nothing but part of the company. Buying shares or stocks entitles its buyer with a right to part ownership of the company depending on the number and quantum of shares.
What are Mutual Funds?
Mutual fund is a basket of different combination of financial instruments i.e. equity and debt. So, investing in mutual funds simply means building an investment portfolio which comprises of equity and debts depending on once financial need and risk capacity.
The higher the risk an individual can take the more equity portion the person buys. The lower the risk the individual can take then the portfolio comprises of debt.
What are Bonds?
A bond is an instrument of indebtedness. In other terms, a bond is a financial instrument that is fixed income investment which represents characteristics similar to a loan taken by an investor to a borrower.
So, when you are buying a bond then simply means the company has taken loan from you.
Now that, we are clear about the meaning and basic features of all these, let's deep dive into the important differences.
Mutual Fund vs Stocks vs Bonds: Difference
In the case of Equity investment, the company is sharing part of ownership with the investor.
In case of bonds, the company is being indebted to the investors. While in case of mutual funds, the investor can be both be the owner as well as lender to the company depending on the investment plans and decisions.
Equity, bonds and mutual funds are all financial instruments which are subject to market risk.
As equity is a more volatile instrument, therefore more risk is attached to it. Whereas Bonds are only debts for the company, thus the risk factor tones down in there.
Further, Mutual fund is a bundle of equity and debt. Thus, the risk of the complete portfolio depends on the percentage of investment you make under which bucket.
3. Income Returns:
The income return on all financial instruments depends on market fluctuations and status. The income of bonds are more fixed and guaranteed than that of equity. Whereas mutual funds here provide a balance to their owner. If you can create a balanced portfolio of equity and bonds, then it may provide the investor with balance yield on the amount invested.
So to sum up, I can say that equity and bonds are opposite poles to each other in the market place environment. Whereas we can call mutual funds are our equator. So, in this spinning market, we have the three biggest financial players which you and I can choose for our personal gains and benefits.
Where do you prefer putting in your money? Do you actively trade in the stock market hours or you are a stay away from it? Mutual funds vs Stocks vs Bonds, who is the winner for you? Or there's yet another investment alternative that you'll like to add here? Feel free to share your views.