Why Bonds are Ideal for Cautious Investors
When it comes to investing, stocks are favorite avenues for spectacular returns, but the high risk associated with them also puts off many a cautious investor. For those who want their money to be safe, yet grow at a decent pace, bonds are good options for investment. Bonds are steady winners and their low returns are a good exchange for the protection they offer when the market is volatile. If you have a low risk appetite and still want your money to work for you reasonably well, then investing in bonds is the strategy you should follow.
Low Risk Avenue for Safe Growth of Money
A bond is essentially a loan made by you to the bond issuer. As creditor/ lender, you are always given first priority by the issuer when it comes to sharing profits. This puts you in a better position to get returns even when the stock holders of the same issuing company have to make do with negligible or no returns. This priority position also ensures that your investment in bonds is at much less risk than that in stocks. A bond with a good coupon rate is also in high demand by buyers who may be willing to pay more that you initially did to purchase this sound investment.
Assured Returns to Avoid Unpleasant Surprises
Assured interest rate (or coupon) on the bond means that at the end of term you are sure to get the returns you expect. Not just your initial investment but also future returns are safeguarded and insulated against changes in market conditions when you invest in bonds. This is especially true of government bonds such as Treasury bonds or municipal bonds. With these, you are lending to the US government, which guarantees repayment on maturity. These bonds are so safe that they are considered cash equivalents.
Falling Interest Rates are Good for Bonds
When the economy is declining, interest rates fall. This spells disaster for most investors but not for those whose money is in the bond market. When interest rates fall, the assured return on previously issued high coupon bonds make them very attractive. Bond buyers clamor to buy such instruments at high prices to insulate themselves from the declining interest rates. By selling your bond at a profit, you can reinvest in other avenues or simply save the sales proceeds in safe investment channels.
Investing in bonds is a good way to balance the high risk of stock investment in your portfolio. A reasonable exposure to bonds keeps your portfolio protected in times of bad market conditions and guarantees a certain minimum return.