With the volatile nature of equity markets, financial planning is becoming a major challenge for the public. Many people are hesitant to invest in shares and are instead looking for different options; bonds are certainly a safer option in such uncertain times. To understand this concept, one must first know the meaning of the term ‘bond.’
Bonds are also called fixed income securities where the investor gets a fixed rate of interest and an assurance of capital protection. Let’s assume that you buy a bond with a face value of USD 20000 at an interest rate of 8% and a maturity of 10 years. You’d earn a total interest of USD 1600 (USD 20000 x 8%) per year, which could either be paid to you annually or bi-annually, and on maturity after 10 years, you would get back the amount of USD 20000 that you had invested.
Ways to Invest
Investing in bonds can be done using any one of the following methods.
- Brokers – The ideal way of investing is to approach a broker. There are the full-service and the discount brokers. While the former provides you investment tips and advice along with the usual trading, the latter only deals with buy and sell orders. Of course, the former takes an extra fee for all the tips that he offers.
- Financial Institutions – Your bank would have a facility where they allow their clients to transact government securities for a fee.
- Treasury Bonds – If you don’t have an existing brokerage account and want to do it yourself, then all you need to do is visit the government website, treasurydirect.gov. It is a hassle-free technique wherein all the transactions including interest payments happen online.
- Debt Mutual Funds – These funds typically buy into low-risk securities, bonds being one of them, and the returns are quite stable, unlike their equity counterparts.
Investing in bonds could be beneficial due to the following reasons:
- You get higher interest rates as compared to a bank savings account.
- It is a safe investment, as one gets the principal amount back in full at the end of the maturity period.
- They offer regular income in the form of interest.
- For retirees, it provides them a regular source of income for the long term.
- As these investors are creditors to the government/corporation, they hold a preferential claim on the assets as compared to the shareholders. In case of a bankruptcy, they are paid before the shareholders.
Having said that, it is imperative that you conduct a thorough research before investing your hard-earned money. Risk-taking capacity as well as financial needs should drive one’s investment strategy. It is recommended that the portfolio is diversified so that losses in one asset class can be offset by gains in another.