Bonds vs mutual funds (debt funds): which is better?

The choice is between holding specific bonds yourself and paying a fund manager to hold a basket.

Side by side

	Bond bought directly	Debt mutual fund
What you own	One issuer's bond in your demat	Units of a pool of many bonds
Return	Coupon plus or minus price change; face value at maturity if paid	NAV moves daily with rates and credit; no fixed maturity value in most funds
Credit risk	Concentrated in one issuer	Spread across holdings
Cost	Platform spread inside the price, or brokerage on the order book	Expense ratio, charged every year
Selling early	Needs a buyer on the exchange or a platform's sell route	Redeem with the fund at NAV
Tax on income	Coupon at slab; 10% TDS on listed debentures	No coupon to you; tax arises when you redeem
Tax on gains	Listed: 12.5% after 12 months, slab within; unlisted: slab	Slab, no indexation, for units bought from 1st Apr 2023

Sources: EY, Business Standard, TaxTMI, TradingQnA AMA.

What does concentration mean in practice?

One default hits a direct holder in full. TruCap Finance NCDs sold through bond platforms went to CARE D on 18th Jul 2025 after a missed payment (CARE). A fund holding the same paper would carry it as a small slice. On TradingQnA, an investor cited advice to use funds rather than direct bonds for this reason (TradingQnA). Direct holders can diversify by spreading across issuers, which needs more money and more reading.

What does liquidity mean in practice?

A fund redeems units at NAV. A corporate bond has to be sold to someone: SEBI's chairman cited a secondary turnover ratio of about 0.3 for corporate bonds in May 2026 (Outlook Money). Some platforms run sell features at a cost; see can I sell a bond before maturity.

Why do people still buy bonds directly?

A held to maturity bond gives a known cash flow and, if the issuer pays, a known end value, which a typical open-ended fund does not. Direct bonds also carry no annual expense ratio, though platforms earn a spread on the way in that none of them itemises per bond (same bond, different yield). For 30% slab investors, the tax gap after 12 months favours a listed bond's 12.5% over a debt fund's slab rate on gains, but coupon income is at slab either way.

Can I buy both on the same platform?

Several bond platforms also distribute mutual funds: Grip Invest lists debt funds, and Altifi, Digifinn and Bondbazaar offer mutual funds too (Grip, Altifi, Digifinn, Bondbazaar). Bond ETFs are a third route that trades on the exchange; how they are taxed is a recurring TradingQnA question (TradingQnA).