Investing always involves risks. Sometimes the risk is minimal, as is the case of treasury bonds, but mostly the risk is substantial like stocks, commodities, and options. The higher the level of risk you are willing to take, the better the returns. So, which type of investor are you? If you believe in a low risk, low return policy, bonds are the best type of investment for you as they are almost free of any risk. We can say that investing in bonds is a method of preserving capital while investing.
Bonds are a form of debt security that is similar to an I Owe You (IOU). Borrowers issue these securities for raising money from investors who are willing to lend them a certain amount of money for a fixed period. There are three main types of bonds: Corporate bonds, High-yield bonds and Municipal bonds.
Most people who hesitate to take risks in investment tend to save in banks, but bonds have a higher interest rate than the rates paid by banks on savings accounts or Certificate of Deposit (CD). So, if you don’t need a certain amount of money for a year or so, it is wise to invest in bonds as they can offer you a relatively better return without taking too much risk.
The top three reasons why you should invest in bonds are:
- Bonds promise a predictable income and pay typically interest twice a year.
- After the maturity date, you get back your entire principal amount.
- Bonds can help create a balance when you simultaneously invest in volatile stock holdings.
So, we can conclude that though bonds pay little, they offer an element of stability to any diversified portfolio. They are a safe and conservative investment that doesn’t require you to put your money at risk.
Bonds tend to be less volatile and less risky than stocks, and when held to maturity can offer more stable and consistent returns. Interest rates on bonds often tend to be higher than savings rates at banks, on CDs, or in money market accounts. Bonds also tend to perform well when stocks are declining, as interest rates fall and bond prices rise in turn. They are like a Safer Haven for Your Money.
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