Introduction
It gets challenging for newbie investors to choose between equities or bonds. This is because equities or stocks are susceptible to market volatility. Price highs or low dips are a kind of adrenaline rush, not every investor is capable of handling under his risk appetite.
On the contrary, bonds, are fixed-income investment options that come to you for a specified tenure, and the term period ranges between 5 years to 20 years or above. However, you may have to lock your capital investments for years.
That leads us to think – Which is a better option- bonds or equities? And, ‘ Are investment bonds worth it?’ Let us find out.
Investment Bonds Explained
Bonds are investment options that have a fixed tenure. These are fixed-income investment options. Mortgage bonds, treasury bonds, government-backed security bonds, and CDs are some of the commonly availed bonds.
These are investment options that provide investors with an income source monthly, quarterly, half-yearly, and annually. The income is in the form of coupon payments that are made regularly to investors.
And, bonds also provide a better degree of protection against investor’s capital investment. In a nutshell, the bonds protect capital investment. The principal amount and interest earnings are paid out to investors at the end of the term period or the tenure of the bonds.
Pensioners, retirees, and senior citizens usually prefer investing in bonds as they get a regular source of income in the form of coupon payouts. At the same time, they are also assured of their capital sum at the end of the investment period. This is a guarantee equity which other investments like mutual funds or ETFs do not provide.
What are the Lucrative Benefits You Get from Investment Bonds?
There are quite several lucrative benefits that you can avail from high-quality investment bonds. Let us have a run-down into the same:
1. Less Risky
Interest rate fluctuations or inflationary norms do not impact the value of bonds. The investors are guaranteed a return of their capital amount despite adverse market scenarios and they get the principal amount at the end of the maturity period the bond states.
2. Regular Source of Income
High-quality bonds provide lucrative sources of income in the form of high-paying coupon payouts that investors get periodically. These coupon payouts also double up as a dependable passive or a second source of income for most of the investors out there.
3. Freedom from Stress or Tension
The market highs or the price lows create an adrenaline rush in the equity or stock markets. Not all investors are capable of handling the kind of stress or tension the volatile market trends create for investment options like stocks, equity shares, or even ETFs. Regular payments are given to investors of bonds or fixed-income investment options even with adverse or volatile market conditions.
4. Tax Benefits
There are government-backed bonds or mortgage bonds that offer lucrative tax benefits in the form of tax waivers. Other investment options like stocks or equities do not offer the tax-saving benefits that bonds provide on an investment portfolio.
Therefore, bonds are better investment options as compared to stocks or equities. However, tax implications vary from one investment option to another. A tax advisor or an experienced tax consultant shall be in a position to brief you on the type of investing options that offer attractive tax benefits.
5. Capital-Guaranteed Investment Options
This is the most lucrative benefit bonds provide investors with. The bonds are capital-guaranteed investment options. This means an investor gets his capital investment back at the end of the term period these bonds are backed with.
As you already know, pensioners, retirees, or senior citizens do not get regular employment comprising 9-5 jobs. Regular coupon payments and return of capital sum at the end of the investment period the bonds provide investors with looks highly appealing to traditional or older segment investors.
How do You Choose High-Value Investment Bonds
These are some of the recommended ways by which you choose investment bonds for your portfolio. Helping you through a run-down into the same:
1. Approach a Private Banking or an Advisory Firm
You must approach an advisory firm or a private banking firm and discuss with experienced professionals as to what type of investment bonds generate lucrative returns in the market and are low-risk investment options too. This way, you get vital cues on what investment bonds are credible and what the investment options are to be dished out.
The fixed income asset allocation between govt-backed bonds and corporate bonds must be done prudently and it is the diversification of investment cum retirement portfolio you must build and the financial advisor can pave the way to helping you out with the same.
2. Speak to a Renowned Financial Advisor
There are well-experienced financial advisors or investment professionals who lend their services to customers on a private level. These people are independent contributors who use their experience, expertise, and intellect to guide consumers on what investment options they can choose and what not to. You can get in touch with a financial advisor over the phone to fix an appointment with him/her.
3. Virtual Meets or G-Meet Suites
You have virtual meets or G-meet suites wherein you connect one-on-one through a virtual interface. This way, you can talk to a financial planner or investment advisor on a one-on-one basis to have a detailed overview of what kind of investment bonds are highly saleable and actionable in the market and what bonds do not seem to be performing well in the market. When you have a virtual meeting, you can get your doubts clarified and then select your bonds wisely.
4. Getting Recommendations from Friends or Business Colleagues
You can get recommendations from your friends or business colleagues who would have the experience of investing in high-yielding bonds. When you receive a positive recommendation from your known circle of people, then it is a green signal for you to invest in those bonds or financial instruments.
5. Online Research
You can do some online shopping to look at websites that sell high-yielding bonds. You can further analyze the pros and cons of every type of bond that sells in the market. This way, you take time to analyze if a said bond is suitable for you or not. You can also have a read-through with disclosure documents to figure out the market risks that are involved in investing via bonds or financial securities. This way, you would be in a better position to know which type of bonds are the right ones for you to invest in.
6. Local Google Searches
You type keywords on local Google searches. For instance ‘Locate a registered advisory firm near me’.
Or type in ‘locate a registered fee-only financial planner near me’. While you type the right keywords via local Google searches or Google’s online directories, you get hands-on with some of the best advisory firms or get the right contact details of authentic financial advisors or experienced practitioners whom you get in touch with.
Searching your leads via local Google searches saves you the time and effort in getting your right fit finalized.
What do You Look for While You Select Investment Bonds
These are the considerations you look for while choosing investment bonds of a high caliber. Helping you through pointers connected with the same:
1. Term of the Investment Bond
You look for the tenure or term of the investment bond. You must figure out if you can dispense a certain amount of money inside an investment bond for an ‘X’ number of years. This way, you figure out if that investment bond is suited for you or not. Investors look for short-term bonds wherein the lock-in period is minimal and post then they can retrieve their funds as needed.
Some investors use the bond value as collateral to secure loans at lower interest rates to finance their immediate financial obligations the investors may have whatsoever.
Therefore, looking for the term period or tenure of the bond is an important consideration you look for when you look for high-yield bonds.
2. Rate of Returns Vis-a-Vis Regular Payouts
You look for the rate of returns on bonds and figure out if the bonds provide lucrative yields as returns on investment. High-yielding bonds provide consistent and high-value payouts in the form of coupon payments to investors. This way, you secure a regular payout from high-yielding bonds.
Therefore, looking for rate of returns on your investment portfolio is another important consideration you look for while choosing investment bonds.
3. Credibility of the Product Issuer
You look for the credibility of the product issuer before you decide whether to invest in the bonds of said investment firm or not. If the credibility of the product issuer is good enough, the possibility of you receiving your bond value at the end of a said term is not guaranteed.
Traditional investors usually prefer investing via Government-backed bonds wherein the surety of receiving the capital investment along with interest earnings is said to be higher on the cards.
Suggested Reads: When is the best time to buy high-quality bonds
What are the Risk Factors While Investing in Bonds
These are the pertinent risk factors you have while investing in bonds. Let us have a look into what these are:
1. Interest-Rate Fluctuations
Interest rates might fluctuate due to volatile market conditions. The rates of return or the periodic coupons paid out to investors might drop or plummet when the interest rates on investment products plummet drastically. Therefore, investors receive lower coupon payouts when the markets are not doing that well.
2. Credit Risk
If the credit rating of the product issuing firm goes downhill and if the product issuing firm goes bankrupt or signs up for liquidation, then the investor may lose a partial value or complete portion of the amount invested in bonds. This is a risk that applies to all types of investment options.
3. Risk of Inflation
You have a risk of inflation that erodes the buying power of bonds for investors. The returns on investment in terms of regular coupon payments in the case of fixed bonds also do not help investors improve their purchasing power as the inflation rate of goods and services is way too high. Therefore, inflationary norms pose serious threats to bondholders on the whole.
4. Reinvestment Risks
When the term of a bond investment is over, the investor would reinvest in similar bonds that yield similar yields or rates of return on the capital investment. These bonds may or may not guarantee the same returns as were prevalent in the previously invested bonds. Therefore, reinvestment risks are on the cards for investors whose bond term gets over and they have to reinvest the money towards other viable sources of investment.
5. Tax Implications
The coupon payouts or the principal redemption you receive from product-issuing firms of bonds are subject to a wide range of tax implications. If your payouts are treated as regular income sources, then higher tax slab rates are charged on the income earned by you as such.
On the contrary, if the income you receive from bonds is treated as capital gain income, then lower tax slabs are applied accordingly.
You must consult a tax advisor who will brief you about tax implications that arise on different types of bond products. You can choose bonds that provide tax benefits and include them in your investment portfolio.
Suggested Reads: Risk factors of investing in bonds
Why is Financial Planning the Need of the Hour for Everyone?
Financial planning is the need of the hour not just for investors who have been investing for quite some time but also for people who want to start afresh.
You never know what kind of financial contingencies you would come up with. Therefore, you must make sure you invest in some kind of investment option. It can be in fixed deposits, bonds, insurance products, or even in equities or stocks.
The investment portfolio you maintain must be a diversified one so that the losses arising from one investment product can be offset by the gains of the other. This way, your investment portfolio remains intact and provides you with steady sources of income for years ahead of your time.
In a nutshell, many investors prefer going in for less volatile bonds and mutual funds that provide them with interest earnings and return of capital at the end of the term period of the bonds.
This way, you can combat inflation and achieve your financial objectives quite seamlessly thereby paving the way to attain long-term financial freedom.
The Bottom Line
Bonds are stable sources of income that guarantee a return on capital by the end of the term period. Returns of investment are made in the form of regular coupon payouts to investors. However, investors must go through the offer documents and understand risks carefully before investing or signing in on the dotted lines. Strategic investment decisions help you prudently achieve your investment objectives indeed.
