Imagine having to choose any one spice between turmeric, chilli powder, and coriander powder when cooking. You wouldn’t want to! They all bring something to the dish. So, why would you stick to any one asset class when it comes to your investment portfolio? Diversification is the key to a sensible investment portfolio, and bonds are an asset class you do not want to ignore.
Bonds are essentially debt certificates issued either by the government or a public or private company when raising money for a project. You are lending the bond issuer money when you purchase a bond against which you earn an ‘interest’ coupon at pre-specified intervals. You also get back your principal investment after the maturity date.
Compared with an asset class like equities, bonds offer a lower return reflecting their low-risk nature. It is advisable that anyone building a retirement corpus or heading towards retirement increase their exposure to debt in proportion to other asset classes as a way to preserve the value of their accumulated wealth.
Most importantly, a strong bond portfolio can provide decent yields with a lower level of volatility than equities. They also can make more income than money market funds or bank instruments. This all means that bonds are a good option for those who need to live off of their investment income.
So, is it worth investing in bonds? Bonds issued either by the central or state governments carry a sovereign guarantee, which implies that the risk of you losing your investment is next to nil. Bonds issued by reputed companies are also rated higher by credit rating companies, reflecting their safety as an investment instrument.
While bonds may not offer the rate of return that company stock does, your returns from debt are more stable. Anecdotal evidence also suggests bond markets are less volatile.
More importantly, bonds are not merely for long-term investors either. Those looking to park their funds for a short time or wish to maintain access to liquid funds could choose from debt instruments such as treasury bills that come with maturity as low as a few days to a couple of months.
Bonds are a good investment when the benefits listed here are your primary goals. In other words, if your primary goals with investing are capital preservation and income, then bonds may be an investment worth considering. If, on the other hand, you’re a younger investor with a longer timeline who wants to prioritize capital appreciation, then bonds might not be worth considering.
More importantly, bonds can help preserve capital for equity investors during times when the stock market is falling. The Indian bond market continues to grow more sophisticated, with products like inflation-indexed bonds and zero-coupon bonds.
So, if you’re looking to build a portfolio with an element of stability in a fast-paced financial investment landscape, you should look at bonds.
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