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Why Everyone Should Invest In Bonds?

May 02.2023
Yogesh Kumar

Bonds are an essential part of any diversified investment portfolio. They provide a steady stream of income, while also acting as a hedge against volatility in the stock market. In this article, we'll explore why everyone should consider investing in bonds.

First, let's define what a bond is. A bond is essentially a loan made to a company or government. When you purchase a bond, you're essentially lending money to the issuer of the bond. In return, the issuer promises to pay you back the principal amount at the end of a predetermined term, along with regular interest payments along the way.

Now, let's discuss why investing in bonds is important. The first and most obvious reason is that bonds provide a regular stream of income. When you purchase a bond, you'll typically receive interest payments on a regular basis, either monthly, quarterly, or annually. This can be an excellent way to generate passive income, especially for retirees or those looking for a steady source of cash flow.

But there's more to bonds than just income. Bonds can also provide stability to your portfolio. While the stock market can be volatile and unpredictable, bonds are generally considered to be a more stable asset class. In times of economic uncertainty, investors often flock to bonds as a safe haven, which can help to mitigate losses in other parts of their portfolio.

In addition to stability, bonds also offer diversification benefits. By investing in a mix of stocks and bonds, you can spread your risk across multiple asset classes, which can help to reduce the overall volatility of your portfolio. This is especially important for investors who are nearing retirement or who have a low risk tolerance.

Another benefit of investing in bonds is that they can help to hedge against inflation. While inflation erodes the value of cash over time, bonds typically provide a fixed rate of return that's designed to keep pace with inflation. This can help to preserve the purchasing power of your money over the long term.

Finally, bonds can also be a valuable tool for managing risk. For example, if you have a large stock portfolio and are concerned about a potential market downturn, you can use bonds to hedge against that risk. By investing in bonds that are negatively correlated with stocks, you can potentially offset some of the losses in your portfolio if the stock market takes a dive.

In conclusion, there are many reasons why everyone should consider investing in bonds. They provide a steady stream of income, stability, diversification benefits, inflation protection, and risk management benefits. While bonds may not be as exciting as stocks or cryptocurrencies, they're an essential part of any well-rounded investment portfolio. If you're new to investing or are looking to diversify your portfolio, consider adding bonds to the mix.




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About IIB

We provide financial planning, advice and resources that investors need. As the financial industry evolves and customer needs become more complex, we have and continue to reinvent, innovate and transform ourselves to be ready for the financial landscape of tomorrow.

Our team is led by Bhavanand Kumar Mishra who has outstanding expertise in the Bond Market, Forex. He is M.B.A, certified associate of Indian Institute of Bankers, certified treasury professional holder from IIBF, Mumbai. He has worked as Chief Dealer in almost all asset classes especially in the Fixed Income in the treasury, with twenty plus years of expertise including overseas experience at London & Birmingham in U.K. in the Punjab National Bank, which is the second largest PSU Bank in India. Mr. Mishra is supported by a team of young professionals.

Why Do You Need To Invest in Bonds?

The size of Indian Bond market is increasing substantially year on year basis and so the opportunity also multiplies. Indian Bond market consists of Central Government securities (G-Secs), State Development Loans (SDLs), Treasury Bills, these securities are also called as Sovereign assets classes. Particularly State Development Loans is a higher yield asset class and suitable for the retail investors. State Development Loans (SDLs) maintains 25 to 50 bps spread from the G-Secs in the respective maturities however, these spread is not sacrosanct and may vary depends on the multiple variables.

As far as Corporate Bonds are concerned, Public Sector Undertakings like PFC, REC, NABARD, NHAI, etc, Private Companies, NBFC are issuing multiple bonds round the year having different maturities. These corporate bonds carry substantial spread from the G-Sec.

Generally, before investing in Bank/Corporate Fixed Deposit, depositors compares the rate of different bank's offered rate of interest and then decides where to invest in. Generally, investors don't give importance to the fact that their deposits per bank is secured only up to INR 5 Lakh. Further, if the individual left with additional surplus money, he/she chooses to invest in the Debt MFs. In the debt MFs, there are multiple entry or/and exit load and other charges which makes their return less profitable than their direct investment in the bond. At the end of day, Fund Managers of the Debt MFs invest in the bonds only which are available in the market.

Summary - The diversification of the investment portfolio is the key to manage hard earned savings. While we don't negate the importance of Bank's Fixed Deposit, but at the same time we also don't appreciate investing all the money either in the Bank/Corporate FDs or in the MFs. In the modern era, when all the information are widely and easily available, we must change the investing habits a little bit to earn more without putting any extra effort. Interestingly, investing in the bond is quite easier than our believe as everything can be done sitting at the home.

What are the Different Types of Investments?

Bonds are issued by organizations generally for a period of more than one year to raise money by borrowing. Following are the types of bonds:

  • Fixed Rate Bonds
    In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are resistant to changes and fluctuations in the market.
  • Floating Rate Bonds
    Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate.
  • Zero Interest Rate Bonds
    Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders.
  • Inflation Linked Bonds
    Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds.
  • Perpetual Bonds
    Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds enjoy interest throughout.
  • Subordinated Bonds
    Bonds which are given less priority as compared to other bonds of the company in cases of a close down are called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are paid first.
  • Bearer Bonds
    Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.
  • War Bonds
    War Bonds are issued by any government to raise funds in cases of war.
  • Serial Bonds
    Bonds maturing over a period of time in installments are called serial bonds.
  • Climate Bonds
    Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.

What are Bonds and Debentures?

In general, Bonds and Debentures are interchangeably used in conversation but they have their own definition and characteristics related to them.

What Are The Different Types Of Bonds and Debentures In India?

Here is the list of popular Bonds and Debentures available in India.

  • Central Government Bonds
  • State Government Bonds
  • Municipal And Local Authority Bonds
  • Corporate Bonds
  • Public Sector Bonds
  • Tax-Free Bonds