Why You Should Invest In Bonds
Have you thought about investing in bonds? Well, they may not be the first thing that comes to mind. Stock market investment is in vogue, the arena of excitement, anticipation, risks, and profits. The market has so much drama that people tend to forget about bonds. Moreover, people believe that the wealthy go after stocks, and so should you. But this isn’t the case.
Bonds may not be the first investment choice, but they should certainly form part of the portfolio for safety and security. Many aspects of bonds make it a favorable investment strategy, and I am here to tell you a bit about that. The article picks up on why you should invest in bonds.
- What are bonds, actually?
I’ll try to simplify it for you as much as possible. A bond is a fixed-income instrument in which an investor gives a loan to a borrower. That borrower is generally a governmental or corporate entity. These instruments are used as an effective means of raising finances. Moreover, these bonds come with maturity dates on which the investor must be paid back the principal amount.
- Bonds Protect Principal
As noted above, these are fixed-income instruments. You invest in bonds for a particular period, after which the principal amount has to be paid back. Stocks are highly vulnerable to market fluctuations, but a portfolio with bond investments can survive better through these circumstances. This is also because the debtholders (creditors) are given priority over shareholders when payment is due.
- Foreseeable Returns
Of course, bonds do not generally yield returns as stocks do. But they give predictable returns. This makes them safe investment options for retirees because they can estimate how much money they will have at maturity. Even if you are not close to retirement, you can use bonds as a buffer for the risky stock investments you’ll make in the market.
- Tax Advantages
It sucks when a significant chunk of your money goes into taxes. However, with bonds, you can save something for yourself. There are specific types of bonds that are extended tax benefits. For instance, interest accrued on municipal bonds does not attract any taxes at the federal level and at the state level (where you live). Similar is the case with U.S. Treasury securities, which are also regarded as risk-free and interest therefrom, do not come with a tax burden.
- Interest rates are better than those of banks
You might wonder whether investing in bonds is better than saving in banks. Typically, the interest rates on bonds are more than those on bank deposits. Many college students park their money in bonds because they yield good, risk-free returns in the long term. If you have a child and want to save for his college education in the future, bonds could make up for a very good choice.
One caveat is bonds are not necessarily insured as bank deposits. If the borrower files for bankruptcy, you may not get your money back. Therefore, experts advised that one should prefer bonds issued by stable, strongly founded governments.
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