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What is a Bond? What are its Pros and Cons?

Introduction

A good investor keeps themselves abreast with the different investment avenues available. A thorough understanding of investment avenues helps diversify your portfolio and make the right investment choices based on your risk appetite. One crucial investment option is Bonds. Governments and corporate firms issue Bonds when they need funds. When you buy them, you give the issuer a loan, and they pay the face value back on a specific date. Additionally, they must make periodic interest payments, usually twice a year.

Bonds do not give you ownership rights like stocks. So, you may not benefit from the growth of the company. On the other hand, you do not see much impact if the market is down or when the company is not doing well. In short, you enjoy two benefits of investing in Bonds it provides an assured stream of income, and you avoid market volatility. 

Let us understand the other pros and cons of investing in Bonds

Pros

Alternative investment option

Bonds allow diversification of the portfolio, and you can find the one that fits your requirements. There is flexibility, and you can choose from short or long-term Bonds based on your investment criteria. You can also pick the preferred coupon structure and decide whether you want to receive the interest annually, bi-annually, or at the time of maturity. 

Low risk

A significant benefit of investing in Bonds is they are low risk. Government Bonds carry less risk than Corporate ones, and you need not worry about losing your money even if the market is down. If you have a low-risk appetite, it is best to invest in bonds. 

Higher liquidity

You will find many investors in the secondary market who are keen to buy Bonds. This way, you can get the principal before its maturity and profit from them. Check the trading history of the Bond before buying them to ensure that you get the liquidity when you need it. 

Cons

Credit risk

Government Bonds have a high credit rating and low risk, while some Corporate Bonds have a lower credit rating and higher risk. With Bonds, it comes down to the issuer's credit quality and when you buy them, monitor the credit rating of the issuing company. A Bond with a low credit rating should be avoided.

Interest rate risk

The Bond prices and interest rates are inversely related. Hence, when the Bond price is high, the interest rates fall, and when the Bond price is down, the interest rates rise. If the interest rates are falling, investors try locking in the highest rates possible and buy every Bond they can. It leads to a rise in demand and a subsequent increase in the Bond yield.

In the opposite case, if the interest rates rise, the investors sell the Bonds that pay low-interest rates, which could cause the Bond prices to fall.

Conclusion

Now that you know what is Bond consider it as a secure and safe investment option. No investment is risk-free, but Bonds have low risk and generate regular income. It helps diversify your portfolio and provide steady interest income.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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