BENEFITS AND RISKS OF BOND INVESTMENTS

While bonds traditionally provide lower returns when compared with stocks, bonds still have a great place in anyone’s portfolio. There are many good reasons to invest some money on bonds. However, there are equally good reasons why one should be careful when investing them.

In this article, we’re going discuss the benefits and risks that can be gotten out of bond investing. If you’re thinking of investing on bonds, you need to know these things!

Benefits

Bonds are good for diversification

Bonds in general have lower volatility if you’re going to compare them side by side with stocks. That means you can stabilize the value of your portfolio during times of market vulnerability.

If you let yourself have a combination of both stocks and bonds over a longer time, bonds can certainly provide sizeable returns with generally lesser risks than a portfolio fully dedicated to just one type of investment.

Bonds can give you stability

If you think you will in need of access to large amount of money in the near future, you would do yourself a lot of good if you avoid putting too much money on a volatile market like the stock market.

Since the bigger portion of the return on bonds comes from interest payments, the volatility or the fluctuation in the price of the bond will just have small impact on the overall value of your investment.

Bonds can give consistent income

Quite different from dividend stocks, coupon payments are consistently sent at regular intervals. If you are seeking for consistent income, bonds are a much better alternative than dividend payments that not all stocks offer.

Bond payments are tax-free

Payments that come from a number of bonds are free from federal taxes. For the people falling under higher tax brackets, these investments are most of the time great vehicles for their portfolio.

Risks

Fixed-income risks

Bonds are often called fixed-income investments. However, that doesn’t really guarantee fixed income. Bonds also come with their very own inherent risks even though they are considered generally safer than stock investments. Ultimately, bonds can still lose their value while you’re holding them.

Interest rate risks

The prices of bonds are inversely linked to interest rates. This means that if interest rates increase, the bond price will slide down. The interest rate on the bond is assigned at the time of the issuance. In general, a coupon will reflect interest rates at the time of the issuance.

In addition, when interest rates increase, people will generally feel reluctant to buy the bonds in the secondary market at the earlier rate.

Credit Risks

People sometimes default on their loans and borrowed products. In a similar manner, organizations that give bonds occasionally default on their obligations. If that happens, the remaining value of your investment can be lost.

Bonds that come from the government are generally free from the risk of default since they can just print out more money if they needed more. However, bonds that come from companies and corporations are more prone to default risks since there’s always the possibility of businesses going bankrupt.