Benefits of Investing in Bonds - Key Advantages & What You Gain

Investing in Bonds is a go-to option for both beginners and seasoned investors alike. Bonds are considered a safer bet than Equity Instruments as they are immune to market volatility.  Let us look at the features of Bonds and the benefits of Bonds that make them popular:

Key Features of Bonds

Bonds are classified into four categories:

Fixed-Interest Bonds: These instruments offer a fixed interest rate throughout the maturity period. Investors receive the same interest regardless of the market conditions.

Floating-Interest Bonds: The interest rate of these instruments gets decided by the prevailing market conditions.

Perpetual Bonds: These Bonds do not have a maturity period, and the interest gets paid for perpetuity. However, the issuing company has no obligation to repay the principal amount.

Inflation-Linked Bonds: These Bonds get issued to combat the adverse effect of inflation. However, the interest rates offered are lower than fixed-interest Bonds.

Bonds can be both listed and unlisted. They can also be backed by the issuing company's assets, making them secured bonds, or be issued without any collateral. Here are the standard features of Bonds:

Face value: This refers to the price of a single Bond.

Interest or coupon rate: This refers to the amount that is payable periodically to the investor. The coupon can be fixed or floating.

Tenure: This refers to the time within which the Bonds mature. The obligation of the issuing company to keep paying the coupon continues until the maturity of the Bonds. The only exception is if the company or investors exercise the Put or Call option attached to the Bond.

Bond yield:  It means the returns investors get from the Bond. The coupon rate, when divided by the current market Bond price provides returns. Yield and Bond price move in opposite directions. When the price rises, the yield declines; and when the Bond price falls, the output goes up.

Credit rating: This refers to the rating that is given to the Bonds by credit rating agencies. It is an assessment of the issuing company's performance in the long term and helps instil confidence in investors.

Benefits of Investing in Bonds

• Bonds help diversify the investment portfolio. A well-established principle of personal finance is that one should never keep all the eggs in one basket and adding Bonds to your investment kitty helps you achieve just that. Through diversification, you can minimise your risks in the event your other investments start performing poorly. This is one of the primary benefits of Bonds.

• Compared to other instruments, Bonds offer assured returns. They are relatively inelastic to the market fluctuations.

• Bonds are like a contract between the issuing company and the investors. The companies are bound to repay the interest and the principal amount of the Bond. Moreover, bondholders are considered creditors of the company and get preference for debt repayment if any bankruptcy proceeds against the issuing company.

Conclusion

Many investors prefer investing in Bonds as they provide a steady source of income. Risk-averse investors are particularly keen on parking their money in Bonds and protecting themselves from sudden crashes in the stock market.