Investing in Bonds

With the volatile nature of equity markets, financial planning is becoming a challenge and many are hesitant to invest in shares and are instead looking for different options and investing in bonds certainly seems to be a safer bet in times of such volatility. To understand the concept of bond investments, one must understand the meaning of the term 'bond' and why should one invest in bonds. Is it an investment option for everyone? And if it is then how good an option it is as compared to shares and stocks. Is it safe? Does it offer good returns on investment? These are some of the questions that are bound to pop up in the head of those who are looking to invest in bonds and rightly so as you are putting your money at stake here. Let us start by understanding the meaning of 'bond' and then you could decide for yourself whether investing in bonds is a feasible option for you or not.

Bond is a debt security and bonds are also called fixed income securities where the investor gets a fixed amount of money if the bonds are held until maturity. I guess it doesn't sound too technical. However, I'll give an example that should clear your doubts, if any. Assume that you buy a bond with a face value of $20000, interest rate of 8% and a maturity of 10 years. You'd earn a total interest of $1600 ($20000 x 8%) per year which could either be paid to you annually ($1600 in full) or semi-annually ( two payments of $800 each) and once your bond reaches maturity after 10 years, you would get the amount of $20000 that you had invested.

How to Invest in Bonds?

Investing in bonds can be done using any one of the following methods.

• Brokers - One simple way of investing is approaching the brokers. You can opt to go to a full-service broker or a discount broker. While a full-service broker gives you investment tips and advice along with the usual buying and selling, the discount broker only deals with buying and selling of orders; be it shares or bonds. Of course the full-service broker takes an extra fee/commission for all the tips and advice that he offers.
• Financial Institutions - Financial institutions such as your personal bank mostly has a facility where they allow their clients to transact government securities but, it is completely dependent on your bank. It might not necessarily have this service.
• Government Agency - If you don't have an existing brokerage account and if you don't wish to go through a broker and want to do it yourself, then there definitely is a way. All you need to do is visit the government website; treasurydirect.gov. It is a hassle free technique where in all the transactions including interest payments happens online.
• Mutual Funds - Mutual fund is a collective investment scheme in which money is collected from many investors and is invested in investment securities that includes stocks, bonds, other securities and commodities, etc.

Advantages of Bond Investments

Investing in bonds could be beneficial due to the following reasons:

• You get higher interest rates on bonds as compared to savings account.
• Making an Investment in bonds proves to be safer as one gets the principal amount in full at the end of the maturity period.
• Bonds offer regular income in the form of interest.
• Investing in bonds especially is useful to those who have retired as it provides them a regular source of income even after retirement.
• As investors in bonds are creditors to the government/corporation, it holds higher claim on assets as compared to the shareholders. Hence, in cases of bankruptcy; creditors that is bond holders have an upper hand and they are paid before the shareholders are paid.

These are some of the advantages of investing in bonds. Having said that, be it shares or bonds all have pros and cons and hence, it is imperative that you conduct a thorough research before investing your hard-earned money. Choosing between bonds vs. stocks basically narrows down to two factors. One, it depends on your needs and second, how much of risk are you willing to take. My personal take on investment is that one should diversify the portfolio and invest in both shares and bonds in a way that you don't run down to terrible losses and the ratios of investing in shares and bonds could obviously vary depending on the amount of risk one is willing to take.