Bonds are considered safe investments. The difference between bonds and bond funds is the interest rates, price, and net asset value. Bonds are like debt obligations, and they are issued by corporations, private companies, or governments. When investors buy a bond, they lend money to the issuer for a specific time and at a certain rate of interest.

Bond funds are mutual funds that invest in bonds and other debt securities.

Understanding bonds and bond funds
Investors allocate minimal amounts to bonds for a variety of reasons like lower interest rates and longer lock-in period. However, investors put their money in bonds as they give a steady stream of income, mostly twice a year. Bonds are ideal for retirees because when bonds mature, they yield the principal amount, thus preserving capital along with investment.

Bond funds are a type of mutual fund, just like equity mutual funds, wherein you invest some funds along with other investors. Unlike bonds, which are issued by entities, bond funds are managed professionally. Bond funds are invested in other securities, thereby helping investors achieve diversification with limited funds.

Comparing price, net asset value, and interest rate
A bondholder is expected to hold the bond till the maturity date. Bonds are classified as corporate, treasury or municipal, and they are backed by the federal government for tenures of one month to 30 years. Bonds are normally issued at the coupon rate or the rate that is close to the existing interest rate in markets. Unfortunately, interest rates and bond prices are not in sync. When bond prices rise, interest rates go down and vice versa.

Bond funds have no single maturity date. An investor can sell their funds to the mutual fund company at the prevailing net asset value of the fund. Investment in open-ended bond funds can be made for amounts ranging from $1000 to $5000. Unlike bonds, bond funds are highly liquid assets, but this liquidity also depends on demand and supply, market performance, and the fund management company. However, bond funds come with fees, such as sales commission, annual management fees, and nominal cost to cover portfolio management.

The only way an investor can have security and a properly diversified portfolio is to invest in fixed-income securities like bonds and bond funds. While bonds can be redeemed only after the maturity date, bond funds can be redeemed any time. The risk of interest rate declines as bonds nears maturity date. There is always a risk of interest rates on bond funds because they are market driven.

The cost of investing in bonds can range from 1% to 5% of the bond’s value. In bond funds, fund houses charge sales commissions and annual management fees.

When you are building your portfolio and looking for some asset that can give stability, it is best to go with bonds. But bonds do require sufficient funds to achieve proper diversification. When investing in bond funds, it is easier to achieve diversification even with a minimal investment because the fund company invests in a variety of securities.