{"id":2383,"date":"2020-09-14T01:27:42","date_gmt":"2020-09-13T19:57:42","guid":{"rendered":"https:\/\/aayushbhaskar.com\/?p=2383"},"modified":"2020-10-12T01:48:21","modified_gmt":"2020-10-11T20:18:21","slug":"etfs-vs-bonds","status":"publish","type":"post","link":"https:\/\/aayushbhaskar.com\/etfs-vs-bonds\/","title":{"rendered":"Bond ETFs vs. Bonds : Which is a better investment?","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

When we are venturing into investment in <\/span> securities\u2776<\/span> that involve lesser risk, we think of bonds and pooled fund investment. Pooled funds are basically individual funds that are consolidated together in a group. Let us look at two important groups of investment funds today – Bonds and ETFs or Exchange Traded Funds.<\/span>
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\n<\/span> Bonds fall under <\/span> fixed income securities\u2777<\/span> while ETFs can come under pooled funds, <\/span> debt funds\u278c<\/span> and can also be considered fixed income securities based on their category.<\/span>
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\n<\/span> You might be familiar with the term bonds, and if you are into hard-core investing, you might have invested in ETFs, or at least have heard about them. Let us see in this article what are the benefits of investing in bonds versus what are the benefits of investing in ETFs. We will also discuss the risks and demerits of each kind of investment. <\/span>
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\n<\/span> However, before pitting Bonds against ETFs, let us first understand the terms in depth.\u00a0<\/span><\/p>\n

\"etfs-vs-bonds-aayushbhaskar\"<\/p>\n

Note: In the end, you will find a glossary of terms that have been used throughout this article. The glossary has been included to make your reading easier and aid your understanding of the financial terms used.<\/span><\/i><\/p>\n

Bonds<\/b><\/h2>\n

A Bond is a loan paid to a government or private organization in lieu of an interest paid bi-annually or annually. When you purchase a bond of a public or a private company, you are lending money to that company. Usually, companies borrow to further growth of their business. The government and government bodies like the Municipality may seek borrowings in terms of bonds to build infrastructures like roads and schools.<\/span>
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\n<\/span> When you purchase bonds, you are an investor to the company but you do not own a part of the company as <\/span> share\u278d<\/span> -holders do. Bond-owners are creditors and have no say in or liability to the borrowing entity.\u00a0<\/span><\/p>\n

At the maturity of a bond, you get paid the principal sum back. The interest you are entitled to get paid in calculated periods of time, usually bi-annually.\u00a0<\/span><\/p>\n

There is no <\/span> exchange\u278e<\/span> marketplace or a central place for bond trading. Bonds are traded mostly over the counter and through bond dealers. Bonds can also be traded privately between the borrower and the lender. <\/span>
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\n<\/span> The bond market, though scattered, is huge worldwide. In India, the bond market is gaining more attention and has significantly grown in the last 5 years.\u00a0<\/span><\/p>\n

There are many kinds of bonds, but we can broadly categorize them in 2 major types :\u00a0\u00a0<\/span><\/p>\n

Government Bonds<\/b> : Bonds released by the Central and State Government, Municipal authorities and Public Sector companies come under Government Bonds. These bonds are also sometimes called Treasury Bonds.\u00a0<\/span><\/p>\n

Corporate Bonds<\/b> : These bonds are issued by private companies to meet their growth target. <\/span><\/p>\n

ETFs<\/b><\/h2>\n

<\/span> ETFs or Exchange Traded Funds, unlike bonds, are traded in exchanges. ETFs are a bunch of securities bundled together for trade. ETFs, like stocks, can be traded on a day to day basis.\u00a0 <\/span>
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\n<\/span> The best way to understand ETFs is to think of a bunch of <\/span> stocks\u278e<\/span> or bonds from different companies traded as a whole.<\/span><\/p>\n

ETFs can comprise bonds or stocks of one particular industry segment, like IT, or can be a motley of bonds\/stocks of different industries.\u00a0<\/span><\/p>\n

A better way to understand ETFs can be to liken them to <\/span> mutual funds\u278f<\/span> . Indeed, mutual funds and ETFs share a number of characteristics. Let\u2019s take a look.<\/span><\/p>\n