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What are bonds? Should investors invest in bonds?

Fixed income investments, where the investor lends or loans money to the government or to a corporate entity for a certain time period, are known as bonds. Depending on one’s financial goals, an investor can choose from fixed interest bonds, floating interest bonds, inflation linked bonds or perpetual bonds.

While fixed interest bonds accumulate steady coupon rates during the tenure of the investment, the coupon rates of floating interest bonds are subject to market trends such as inflation and other factors. Inflation linked bonds help reduce the impact of inflation on the bond’s face value and interest return, while perpetual bonds offer the benefit of steady interest payments or perpetuity to the investors.

Bonds have always been considered as stable investment options, considering the principal returns and the dependability of interest. Hence, investors who are seeking low-risk investment options tend to choose bonds.

Apart from offering stability in terms of returns, bonds also have a legal guarantee where the borrower is bound to return the principal amount to the investors when the tenure is due. One can consider investing in corporate bonds who draw huge investments from the market, as the reputation of these companies in the stock market is one of the factors why they are not likely to default on their interest payments. Apart from that, bonds are also good for diversifying and adjusting the risk in one’s portfolio.

Those considering safe debt instruments for investment may opt for bonds offered by high-safety rated companies. Also, if an investor is open to taking on a little more risk, they may consider low-safety rated companies for higher returns on the bonds. 

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