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Bonds vs Bond Funds

Writer # Indiabonds | May 23, 2023

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Investors are perplexed by the most recent amendments in the bond market. Following the elimination of the indexation benefits for bond funds, individuals may find themselves uncertain about where to invest their money, specifically in bonds or bond funds. However, do not fret, as this article will provide valuable insights into the age-old debate of bonds vs bond funds, especially given the new changes in the Indian debt market space.

The first quarter of 2023 has proven to be a highly eventful period for the Indian debt market. Three significant developments have taken place:

  1. The ending of tax arbitrage of Market-Linked Debentures.
  2. Abrogation of indexation benefit of debt funds.
  3. Listed bonds to incur a TDS of 10%.

The changes brought about by the Union Budget 2023 and the Finance Bill have altered the market’s landscape, leaving investors to reassess their strategies and make informed decisions.

To better understand the distinction between bonds and bond funds, it is crucial to grasp the fundamentals of both concepts:

Bonds – Fixed Income securities such as ‘Bonds’ are commonly utilized by institutions or governments as a means of raising capital. When you purchase a bond , you are essentially lending money to the issuer for a fixed period, typically ranging from a few months to several years. In return, the issuer pays you interest at a fixed rate until the bond matures and the principal is returned to you.

Bond Funds – Bond funds are a type of mutual fund that directs its investments towards a collection of bonds. These funds pool money from several investors and use it to buy a diverse mix of bonds, including those issued by companies, governments and municipalities. Bond funds can provide investors with exposure to a broad range of bonds with different maturities, credit ratings and yields, which can help to reduce risk and increase returns.

Difference between Bonds & Bond Funds:

 BondsBond Funds
DefinitionFixed-income securities issued by governments, companies or other entities that offer a predetermined rate of return.Investment vehicles that pool money from multiple investors to purchase a portfolio of bonds.
DiversificationLimited to the number of individual bonds you hold.Provide diversification through exposure to multiple issuers, sectors and credit ratings.
Mark to Market RiskNo impact when held to maturitySubject to mark to market on exit as dependent on fund NAV
YieldThe yield on bonds is fixed and determined at the time of purchase.The yield on bond funds is variable and can change based on the fund’s holdings and market conditions.
ManagementBonds do not require ongoing management.Bond funds require active management and do charge fees.
CostsPractically no costs as compared to bond fundsBond funds may have higher fees due to management costs and expense ratio.
Investment Horizon Bonds are generally held until maturity.Bond funds can be held for any investment horizon.

Consider Investing in Bonds Instead of Bond Funds – Here’s Why:


The advantages of indexation on bond fund long-term capital gains (LTCG) are now obsolete and instead, subject to taxation based on the individual’s income tax brackets i.e. short-term capital gains (STCG). The main incentive that drove investors towards bond funds is no longer relevant. Bond funds are currently subject to the same level of taxation as other fixed-income investment products.


Because of the aforementioned factor, when the expense ratio and management costs of the AMCs are factored in, the yield of bonds decreases, rendering them a costly option.

Bonds selection criteria:

Bond investing offers investors the opportunity for complete control and customization of their portfolio. Investors have the freedom to choose the bonds they prefer and possess comprehensive knowledge of the bonds they purchase, including credit rating, coupon rate and maturity date, enabling them to earn all the interest from their investment. On the other hand, bond funds have their own discretion in bond selection. This may lead to investor owning securities which he may not want or can be of lower quality than desired.

NAV-based valuation:

When investing in bonds, the maturity date determines the principal amount that will be returned upon maturity. However, with bond funds, the portfolio may contain multiple bonds with varying maturity dates, making it challenging to predict the value of the investment at the time of sale. Moreover, exiting the fund may subject investors to interest rate risks that could potentially impact the principal amount. Essentially, while bond investments offer a guaranteed return, bond funds can be uncertain due to their diversified portfolio.

Where to invest bonds or bond funds?

Currently, investing in bonds directly proves to be more advantageous compared to investing in bond funds.  This is also due to SEBI regulated OBPs (Online Bond Platforms) which have made selection, choice and investment very easy now Despite the benefits, it is important to consider both the pros and cons when considering investing in bonds vs bond funds. Each investment option has its own unique set of advantages and disadvantages and the choice ultimately depends on the individual’s investment objectives and risk tolerance. If you’re looking to invest in bonds, you can check out curated lists of bonds on IndiaBonds to enjoy a seamless bond investment experience.


Q. What is AMC?

A. An Asset Management Company (AMC) is a financial institution that specializes in professionally managing and investing assets on behalf of its clients while providing tailored investment solutions that align with the client’s goals and risk tolerance.

Q. What is NAV?

A. Net Asset Value (NAV) in a mutual fund represents the fund’s per-share market value, providing investors with a transparent and accurate measure of the fund’s overall value.

Disclaimer: Investments in debt securities are subject to risks. Read all the offer related documents carefully.