Risks and Benefits in Bonds

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Bonds can be reliable source of current income. It depends on structure of bond you buy. However, bonds provide certain element of liquidity as bond market is large and active. In spectrum of investment option bonds are low risk investment.

Benefits of investing in bond in India

Secured bonds issued by corporate offer high security compare to normal corporate deposits. Also these bonds are offer at high rate of interest compare to fixed deposits bank. However, Govt of India offer tax exemptions along with normal rate of interest. Additional, you can invest in high credit rated bonds issued by bank or financial institution bonds.

If you sell bond before it matures, you may received more or less than your principal investment. Because, all bond values fluctuate. Bonds have set maturity dates from one to 30 years. Like short term, intermediate bonds and long term bonds. When bond reaches maturity bond issuers repay full principal amount of bond in lump sum. Hence, check Types of Money Market Instruments

Risks of Investing in Bonds

All funds offer balance between risk and potential return. Risk is chance that you will lose some or all money you invest. However, return is money you stand to make on investment. You need to balance between risks return by type of investment. General, to earn high returns you have to take greater risk. Bond market is no exception to this rule. Hence, Bonds are considered less risky than stocks for several reasons.

Understand Risks before you invest

Bonds have role to play in every portfolio. For more information see Asset allocation. Before you invest, however you need to understand these risks of bond investment. Bonds are considered safer than shares but still have some risks. This includes interest rate risk, where market rates rise and you find that you are earning less with other investments.

There is also inflation risk in bonds. Where high rate of inflation lowers value of interest you earn. Other risks include liquidity risk this means you cannot find buyer when you want to sell. Some bonds are safer than others. Governments are safer than company issued bond.  However, safer bonds tend to have lower interest rates than riskier ones.

Subordinated bonds are more risky than senior bonds usually have lower credit rating. For any investment, get professional advice before investing in bonds. Financial Markets Authority has more information on how to protect ourselves when you invest in bonds. Hence, you can see Non Convertible Debentures (NCD)

How you can buy these bonds Individual bonds are traded on bond market. Bonds can be bought through share broker or an online service. Prices of bond that can be traded are published on debt market and in newspapers. These fund managers pool buyers’ money and spread it across number of different bonds. Let us diversify our money rather than putting it all into one single bond. So all our eggs are not in same basket.

Who can buy these bonds?

You can buy corporate bonds which offer high interest rates. However, investing in secured bonds will be better option. If you do not want to take risk and looking for capital protection. Then you can buy government bonds. Also when interest rates are falling then invest in bonds. It is better option as other investment options offer low returns.

Finally, see advantages and disadvantages of bonds. For more details see types of investment costs for bonds. But also see which is more liquid business or a bond. Hence, check performance of bonds mutual fund in market.

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