Mutual Fund and BOND
Mutual Funds
Mutual funds are investment companies that pool money from investors and in some cases offer to sell and buy back issued units on a continuous basis, and use the capital thus raised to invest in securities of different companies.
A Brief of How Mutual Funds Work
Mutual funds can be either open ended or closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds usually issue units only once.
Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their
shares by investors, usually at a discount to the net asset value (NAV).
Open-Ended Mutual Funds
Here an investor can buy the shares at any point of time and exit from it at any time of his choice. Both buying and selling will be at the current NAV subject to load factors wherever applicable. Though this is a very broad category, one can easily say this is the most popular of the lot looking at the ease with which one can liquidate his holding (exit from position by selling or redemption to the trust/fund). Affordability is another key factor that decides the popularity of open-ended funds. Those who cannot afford high initial prices can buy with low rupee values and even on a monthly
basis.
Closed-Ended Mutual Funds
Selling of a specified and limited number of shares by mutual funds at an initial public offering is
known as closed-ended mutual fund. However, one important difference between open-ended fund and closed- ended mutual fund is that the price of the latter is decided by demand and supply of the stock in the market and not by NAVs unlike in the former case. The pooled funds are utilized as per the mandate of the fund and securities regulations. They are traded more like the general stocks.
Some of the reasons to invest in this category:
- Prices are determined by market demand and thus closed-ended funds trade at lower
than the offer price more often than not, which generally offers a good buying opportunity
(at discounted prices). - Like in the open-ended funds, there are wide options for you to choose from. Like stock
funds, balanced funds that give full asset allocation benefit and thirdly, bond funds.
Exchange Traded Funds
The Exchange Traded Funds are a basket of stocks and trade like a normal security on exchanges,
tracking a stock or bond index, much like index funds. The prices of ETFs are determined by market
forces and thus no NAVs can be fixed. The advantages of ETFs include buying and selling like you
can do with any stock traded on the exchange, not excluding short selling, while you enjoy the
diversification of an index fund. There are no fees/loads on these funds, other than the commission
you pay to the broker.
Benefit with Open a Account with Spread x
- Hassle-free account opening process
- Branches conveniently located across India.
- Dedicated Relationship Managers to understand your requirements
- Trade on phone facility
- 24x7 access to digital contracts, portfolio tracking, and more
- Secure transactions with automated funds and securities settlement
- Invest in Equities and all other NRI investment products at the same time
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed as maturity.
A bond is simply a loan in the form of a security with different terminology: The issuer is equivalent to the lender, the bond holder to the borrower, and the coupon to the interest. Bonds enable the issuer to finance long-term investments with external funds. Note that certificates of deposit (CDs) or commercial paper are considered money market instruments rather than bonds.
Bonds and stocks are both securities, but the major difference between the two is that stock-holders are the owners of the company (i.e., they have an equity stake), whereas bond-holders are lenders to the issuing company. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).
Types of Bond Market
Depending on the type of bond and the type of buyer, multiple types of bond markets exist:
Types of Bond Markets Based on Buyers
a) Primary Market – The main market is where the bond issuer sells bonds to investors directly. New debt securities are being issued in primary markets.
b) Secondary Market – The definition of the bond market incorporates flexibility. Bonds purchased in the primary market can be sold on the secondary market. Brokers assist in the secondary market buying and selling of bonds.
Types of Bond Markets Based on the Type of Bond
a) Treasury Bonds
b) Agency Bonds
c) Municipal Bonds
d) Corporate Bonds
e) Savings Bond
f) Corporate Bonds
g) Inflation-Linked Bonds
h) Convertible Bonds
i) Sovereign Gold Bond
j) RBI Bond
Types of Bond Markets Based on the Type of Bond
Treasury bills, notes, and bonds issued by the Treasury Department are the most important bonds. All other long-term, fixed-rate bonds have their rates determined by them. The Treasury auctions them out to pay for the federal government’s activities.
On the secondary market, these bonds are also resold. They are the safest because the government guarantees them. As a result, they also provide the lowest return. Almost every institutional investor, firm, and sovereign wealth fund owns a stake in them.
On the secondary market, these bonds are also resold. They are the safest because the government guarantees them. As a result, they also provide the lowest return. Almost every institutional investor, firm, and sovereign wealth fund owns a stake in them.
These are the bonds that are guaranteed by the federal government.
Different cities issue municipal bonds. They are tax-free. However, their interest rates are slightly lower than corporate bonds. They carry a slightly higher risk than federal government bonds. Cities do default on occasion.
Companies of all shapes and sizes issue corporate bonds. As they are riskier than government-backed bonds, they pay higher interest rates. The representative bank sells them.
The Treasury Department also issues savings bonds. Individual investors are supposed to buy these bonds. They are printed in small enough quantities to be inexpensive to individuals. I bonds are similar to savings bonds, but they are inflation-adjusted every six months.
Companies of all shapes and sizes issue corporate bonds. Since they are riskier than government-backed bonds, they pay higher interest rates. The representative bank sells them.
In such type of bond, both principal amount and interest payments are indexed to inflation. Inflation indexed bonds are an efficient way to counter the inflation risk.
This kind of bond allows its holder the option to convert it into equity based on pre-specified terms.
The Government of India also issues sovereign Gold Bonds. Gold bonds are in form of a security as it in the form of the Government of India stock. It also carries interest rate which is paid regularly and has zero risk of handling that exists in physical gold.
The Government of India decided to issue 7.75% Taxable Bonds, 2018, with effect from January 10, 2018 [2], for enabling resident citizens/HUF to invest in a taxable bond, without any monetary ceiling.
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