When you first put your foot in real world, it is scary. Most of us feel unprepared for the responsibilities that come on us and our first instinct is to search online. These days access to all information via mobile phones is so easy that many a time we are unable to differentiate between what is real and what is delusional.
Numerous videos of people claiming that they earned thousands of bucks within few weeks and claim to get guaranteed return on your investments etc. attract youngsters to invest funds without carrying out any due diligence.
It is sad to see that most of the times this leads to scams and frauds which happen with young investors because there is so much misinformation about investments in equity, bonds, cryptocurrency, and many other classes of assets.
But just remember, the best defence against misinformation is information; and the more you know about risks and potential rewards of the investment, the more informed and safer you will be. So, here I am to help you understand about Bonds in simple language without using technical jargons.
Firstly, let’s try and understand what is a bond?
A bond is much like a loan. It is basically a debt instrument wherein you are lending money to government or corporations. Let’s take an example- say a company is asking for certain investment in money. In exchange, it promises to pay you back the investment along with the interest over specified period of time.
For example- you invest in 3-year bonds of Rs.10,000 paying 5% interest. In this case the entity will pay you interest on Rs.10,000 every six months or as specified and at end of 3 years it will pay back Rs.10,000 that you initially invested.
Bonds come in a variety of forms like Corporate Bonds, Sovereign Bonds, Gold Bonds and so many more which have its own set of advantages and drawbacks. Without digging deeper in these intricacies let’s keep it simple and try to first understand the pros and cons of investing in Bonds.
Briefly speaking, one of the advantages of buying bonds is that they are relatively safer form of investments and provides a predictable streamline of income. But the biggest advantage of investing in bonds is Diversification. Over long run, it proves to be a stable growth and it also helps mitigate your financial risk.
In terms of cons issuer can default in payments, less transparency, smaller returns as compared to some other classes of assets, interest rate risks, etc. which has to be kept in mind before investing.
Are Bonds a good investment option?
Only you can answer this question but here are some scenarios to consider:
- If you are only willing to take small risks and can’t bear the thought of losing money then bonds are more suitable investments than other class of assets.
- If you’re heavily invested in equity or other risky assets, bonds are good alternative to diversify and protect your portfolio from market volatility.
Age can play a major role in the formation of your investment portfolio, but in the end, the biggest impact is your financial goal, the timeline you have set to reach your goal and the amount of risk you are willing to take over that period which will help you determine where to invest.
For example, you are 22 years old, an aggressive position may be suitable if your timeline is long whereas someone can be 25 years old but saving for starting business of his own may have conservative approach as their timeline is short.
Where to invest if I have Rs.10,000 right now?
We have a bunch of super talented team members at Tipson’s who would help you understand and answer all your queries regarding bonds and give their expert suggestions on basis of your risk appetite, goals etc. Understand all the risks associated and invest wisely. Head straight to www.thefixedincome.com for starting your journey!