Investment in Fixed deposits and bonds investment are the most debatable but preferred investment choices other than stocks. These are different investments in terms of benefits and risk factors mainly. While fixed deposit interest rates are low, yields on quality bonds and returns on fundamentally strong stocks are higher. An investor should understand the pros and suitability of all these investments to create a balanced bonds portfolio.
Advantages of Bonds over Fixed Deposits and Stocks
Bonds are an important part of any diversified portfolio. Bonds may be less exciting than stocks, but they offer numerous benefits over stock investments and investment in fixed deposits. Let us tell you key benefits among those.
- Bond investment is a safer haven for your funds.
Investing in debt instruments is safer than equity. Bonds mean a debt investment, and stocks mean equity ownership. Debtholders are the creditors in the company and enjoy priority over shareholders. In case a company is on the verge of bankruptcy, debt holders are paid first. If the scenario is worse, the debt holders still get at least some of their investment and there are chances that the shareholders might lose their entire capital.
- Bond Investments offer more stable and consistent returns.
You can Buy Bonds that generate attractive returns when the interest rates in an economy are declining and the stock market is down.
- Bonds offer predictable returns.
Looking at history, stocks outperform bonds, but it is hard to predict. Often bonds are predictable at a greater degree of certainty, unlike stocks. In certain situations in life, investors like retirees look for security and predictability over any other feature of an investment. Investors can predict their bond investment gains and determine the amount they need to contribute to purchase bonds to achieve their financial goals.
- Bonds offer higher returns if held till maturity.
Long term bonds interest rates (coupon) are usually higher than the fixed deposit. Most investors generally consider bonds for long term investments. Bonds have the potential to provide you with relatively better returns without exposing you to high risk, unlike stocks. If you hold your bond investments until it matures, you can gain significantly high returns.
How much should one keep for bonds investments?
There should be an optimal asset allocation in your bonds portfolio considering investing timeline, risk capacity, financial goals, and income level. Considering an old rule, investors can determine equity and debt allocation in their investment portfolio by subtracting their age from 100. An investor at 55 can allocate 45% of his/her funds to stocks and 55% to bonds and other investments.
The main categories of bonds are:
- Government Bonds – issued by the Government of India.
- Corporate bonds – issued by private companies.
- Tax saving bonds – generally issued by the government.
- Bank and Financial institution bonds – issued by banks and financial institutions.
These different types of bonds come with different time-frames, returns, risks, taxes and benefits to an investor’s portfolio. You can seek the guidance of experienced financial advisors to strategize bond investing considering market fluctuations.