When you buy a bond from a company, you are essentially loaning the money to the company to fund their projects. This money is loaned by you to the company for a specific period of time. After this period, the company returns your money along with an interest paid on it.
The total returns on the bonds may not always be fixed, as is the case with variable interest rate bonds. So be cautious about the amount of money you invest in bonds and check on the reputation of the company with whom you plan to invest.
Difference between a bond and a bond mutual fund
Even though both bond and bond mutual fund require you to make a certain investment towards the company, there is a difference in the way they work. The returns you get with both these instruments differ.
With a bond, you will get the principal amount and interest on your investment when the bond reaches its maturity period. On the other hand, with a bond mutual fund, your returns will depend on the profits that the company generates over a period of time. So your returns on bond mutual funds are more uncertain than the bonds.
Avoid investing too much in bonds
Avail bonds for a reasonable amount and avoid investing all your savings into it. This is because the principal on your bonds is fixed and by the time your bond reaches maturity, inflation could have brought down the value of the money. So if you invest too much in bonds for a duration of time and the inflation rate is high, then chances are that the amount might come down in value post maturity.
Why invest in bonds?
One of the reasons most investors opt for a bond over stocks is that a bond is more stable than stocks. So while bonds may not bring in as much returns as the same amount in stocks, the certainty of getting both interest and principal on your bonds when it reaches maturity is higher than that of getting good returns from your invested amount in a stock that doesn’t fare well.
Another reason why bonds are favored is because they provide a steady stream of income since the interest payments for the bonds will be made to you by the company periodically. For this reason, bonds are a good investment option for retirees.
Bonds have two main aspects to them- firstly they are a more stable medium for investment and secondly they may not be as profitable as stocks are. So depending on which aspect is more important for you, you can decide whether taking a bond should be part of your investment strategy.