Portfolio Diversification
Bonds enable efficient portfolio diversification and thus assist in portfolio risk-mitigation.
Bonds are a unit of corporate debt funds issued by different companies and securitized as tradable assets. A bond is referred to as a fixed-income investment instrument because they traditionally pay a fixed interest rate to its debtholders. Variable or floating interest rates are also now quite common under bonds. Bond prices are inversely correlated with interest rates – When rates go up, bond prices fall and vice-versa. They have maturity dates at which the principal amount must be paid back in full or risk default.
Bonds provide a predictable stream of income by paying interest twice a year. Bonds also help offset exposure to more volatile stock holdings.
Corporate Bonds are issued by a company. In many cases, these companies issue bonds rather than seeking loans from a bank for debt financing because bond markets offer more favorable terms and lower interest rates. Corporate debt instruments with maturity shorter than one year are referred to as commercial papers. This instrument trade in decentralized and over the counter markets.
Municipal Bonds are issued by states and municipalities. Some municipal bonds offer tax-free coupon income for investors. Typically, only investors in the highest tax brackets benefit from buying tax-exempt municipal bonds instead of taxable bonds. Municipal Bonds are a great way of safe investing. These are sometimes also known as local authority bonds or by other names.
Bonds enable efficient portfolio diversification and thus assist in portfolio risk-mitigation.
Bonds carry a very low market volatility as compared to the prices of equity funds or mutual funds.
You can get a very low market risk when you start investing through Government Bonds.
Bond Investors can select a high priority claim to their assets over preferred stockholders.
A few Bonds offer tax-free interest income to investors, depending on their tax bracket.
Bonds typically offer predictable returns and can be an attractive option for income-seeking investors.