Perks of Investing in Bonds and Debentures
Bonds and debentures, like loans, are enormous quantities of money borrowed by large corporations, banks, and multinationals. Borrowed funds are typically utilised to fund certain company objectives. If you have purchased a bond, you are a lender to the corporation that issued the bond. The bond issuer will pay you an annual interest rate (coupon rate) on the amount borrowed until the maturity date or for as long as you hold it. You will receive the principal amount invested upon maturity.
We explore in depth at how various fixed income investing options can benefit the investor.
Option 1 for Fixed Income Investment: Your Principal Amount Remains Untouched
The principal amount placed on the bond will always remain safe, making it the ideal place to put your spare cash. You will receive an additional set annual return based on the bond’s coupon rate (interest rate). And if you invest in a bond with a high credit rating of AAA – A, you will almost certainly earn larger returns than on Fixed Deposits.
Option 2 for Fixed Income Investing: Generate Stable, Fixed Returns
Not everyone is interested in making money on the side. Bonds are a great option for consumers who want to earn money at a steady, predictable rate. Furthermore, if you are experiencing a job interruption or a financial crisis, these regular returns will help you get by.
Option 3 for Fixed Income Investing: Enjoy Consistent Financial Growth
When it comes to stock or share investing, there is always the risk of market volatility. As a result, even after long tenures, there is no certainty of substantial returns. Bonds, on the other hand, will steadily increase your wealth. You can predict how much money you’ll make at the end of your contract and prepare to meet specific financial goals at that time.
Option 4 for Fixed Income Investment: Bonds are Safer than Equity and better performing than Debt Mutual Funds
Bonds and debentures are examples of debt investments, whereas shares and stocks are examples of equity investments. Debt holders now have an advantage if a company defaults or goes bankrupt. This is because corporations are required to repay debt holders before stock holders in the event of a crisis. (With the exception of AT1 bonds, which have conditions that can make them riskier than equities.) More information can be found in our glossary here.)
When compared to the other forms of Debt Mutual Funds, Bonds have historically provided higher yields than the majority of Debt Mutual Funds. Bonds are also less taxed than Debt Mutual Funds. Debt mutual funds promise future gains based on their historical performance. There is no guarantee that they will continue to outperform in the future. Bonds, on the other hand, are pure debt instruments that are required by regulations and law to pay the fixed returns mentioned in their issue statement until maturity (Information Memorandum).
So, as long as you’ve done your homework on the bond issuing firm and the credit rating agencies score them between AAA and A, you can invest in them with confidence. So, if you haven’t already, it’s time to really consider investing in bonds.
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