Similar to loans, bonds and debentures are large sums of money that are borrowed by big corporations, banks, and multinationals. This borrowed money is usually used to finance certain business objectives. If you have invested in a bond, then you’re a lender to the company that has issued the bond. The bond issuing company will pay you an annual interest (coupon rate) on the amount borrowed, till the maturity date or as long as you hold it. On maturity, you will get back the principal amount invested.
We take an in-depth look into how these fixed-income investment options can be beneficial to the investor
1. Your Principal Amount Remains Untouched
The perfect place to park your extra income, the principal amount invested in the bond will always remain safe. You will earn an additional fixed annual return based on the coupon rate (interest rate) of the bond. And if you’ve invested in a bond with a high credit rating of AAA – A, then you’re bound to make higher returns than Fixed Deposits.
2. Generate Stable, Fixed Returns
Not everyone is looking at making money sporadically. Bonds provide the perfect alternative to people who’re looking at earning money at a stable, predictable rate. Moreover, if you’re going through a career break or financial crisis these regular returns will help you tide over.
3.Witness Steady Financial Growth
There’s always the worry of market volatility when it comes to investments in stocks or shares. So even after long term tenures, there’s no guarantee of high returns. Bonds on the other hand will grow your wealth at a steady rate. You can know for sure how much money you’ll earn at the end of tenure and you can plan to achieve certain financial goals at that time.
4. Bonds are Safer than Equity and better performing than Debt Mutual Funds
Bonds and Debentures are a form of debt investment, while shares and stocks fall under the equity segment. Now, if a company defaults or goes bankrupt, debt holders are at an advantage. This is because companies are obligated to pay back debt holders before equity holders in case of a crisis situation. (Exception: AT1 Bonds have clauses that sometimes make them riskier than equity. Read more about this in our glossary here )
When compared with the various types of Debt Mutual Funds, Bonds have typically given greater yields than most of the Debt Mutual Funds. Also, Bonds are more tax-efficient than Debt Mutual Funds. Debt Mutual Funds claim returns to be given in the future based on their past performance. There is no guarantee that in the future, they will live up to their past returns. Bonds, on the other hand, are pure debt instruments, are obligated by regulations and law to pay their fixed returns till maturity as is stated in their issue statement (Information Memorandum).
So, as long as you’ve done your research on the bond issuing company and the credit rating agencies have rated them between AAA – A, you can invest investing in them safely. So, it’s time to actively consider investing in bonds, if you haven’t done so yet.