With so many investment options in the market, it can get a bit overwhelming at times with what could be the right investment approach.
And one of the golden investment wisdom we often get from our investment advisors is diversification of your investment portfolio with mutual funds (debt and equity funds), shares, gold, and bonds like government and corporate bonds.
Investment in Bonds can play a key ingredient towards a balanced portfolio. If stock markets go down, bonds can help cushion the blow.
But not many aspiring investors have a thorough understanding of the bond market.
They have looming questions in mind like, Are bonds a safe investment option?
How much should I invest?
What are the returns?
Well, the first step to investing is to understand what to invest in.
For beginners, bonds are a great place to start. Many financial advisors are working hard to help people understand more about bonds, especially those considering investing in them.
So today for our readers, we will be talking about bonds.
We explore the meaning of bonds, types of bonds, and features of bonds.
1. What are Bonds and how to invest?
Bonds are a type of debt instrument that is issued by a government, a municipality, or a corporation (and sometimes by local authorities). They typically pay a fixed rate of interest every year. They come under fixed-income securities.
In simple terms, Bonds are considered a loan from an investor to a borrower such as a company or government, that involves borrowing money from lenders and then paying back the borrowed money to the bondholder by periodic payments over a fixed time period with interest. The borrowed amount is called the principal amount.
The one-time "bond issuance" is the money borrowed by the company for its operations, while the interest paid back to the lender is the principal amount. Over time though the market value of the bond can change.
Bonds are, therefore, essentially IOUs issued by businesses and governments.
Here, we will be exploring all about bonds. Listed below are some of the topics that we will be discussing through this blog.
2. Features of the different types of Bonds.
There are many types of bonds and it can be confusing to know about them all.
The bonds are divided into two main categories:
Government Bond/ Government Securities: Bonds issued by the central or state government at periodic intervals. The tenure ranges from medium to long term, as per which the interest is paid on a half-yearly basis.
Corporate Bond/ Debentures: Bonds issued by public companies, it`s a secured corporate debt instrument that offers interest for funding its operations, but in the case of the unsecured debt instrument, it is also known as a corporate debenture.
Some of the features of Bonds to keep in mind
Redemption Value: The value that’s paid to the bondholder, at the time of expiry of the term from the time the bond is issued.
Par value: The amount which the company or government body promises to pay at the time of maturity, the value is often stated on the bond.
Coupon Rate: The fixed rate of interest that’s payable to the bondholder.
Maturity Date: The bond achieves maturity, and the principal amount is paid to the bondholder.
Invest in your future the right way
OPEN AN ACCOUNT
- 1 year free AMC
- Easy account opening
4. How to invest in bonds? You can invest in bonds by buying new issues, purchasing bonds on the secondary market, or buying bond mutual funds or exchange-traded funds (ETFs) individually or with the assistance of your investment advisor.
5. Risks to consider when investing in bonds.
The risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk. When it comes to bonds, the risk factor depends mainly on how credit-worthy and trustworthy the issuer of the specific bond (Government or Organization) is? Interest rates are also another factor that influences a bond`s value. Bonds issued by the government come with a lesser risk compared to the bonds issued by corporate.
Conclusion: Bonds have a lot of benefits, but you must understand them before you should invest in them. Choosing the right bonds to invest in could yield huge returns and help you reach your financial goals.
For more information on online investment like bonds and advisory services from the top advisors in Mumbai, get in touch with us today!
Also Read: Why It Is Important To Invest In Stocks From An Early Age?