Bonds: A way to diversify your portfolio
Updated: Jun 15, 2021
What does each one of us think of doing when we have accumulated some savings? Other than shopping of course!
We look for a mode of investment which will generate a periodical source of income, incremental to our savings, with the ability to compound the investment if required.
Now this can be achieved by investing in either only one instrument or multiple instruments, subject to your risk-taking appetite.
And that’s where the metaphor most of us have so heard of comes in handy, “Don’t put all your eggs in one basket"!
Diversification of an investment portfolio plays a pivotal role in your investing decisions, be it for a risk-averse or a risk-taker investor. It not only minimizes your risk appetite; it also provides a buffer to downplay the market if it comes to that.
The key is to understand how to ensure you safeguard your returns, balancing the level of risk you are willing to take, and being offset by a source of fixed income to hold your nerves!
Bonds, is the answer that you will stumble upon which will provide you the flexibility of diversifying your portfolio with an instrument generating a fixed income for your invested savings, with a periodical coupon payment and a fixed return on maturity and yet not being extremely subject to market volatility.
With a downward trajectory of interest rate income, and an ever-volatile market scenario, Bonds yielding a periodical coupon value provides an opportunity for investors looking to diversify their portfolio.
However, one must do the due diligence to identify which Bonds to invest in, Corporate or G-Sec, and other contributing factors like a credit rating.
Former will yield a comparatively higher coupon value but the latter is a sure shot safe and secure option and viable for those who are risk-averse, yet looking for a comparative return on their investments.
Periodic coupon payments, exempt from tax for Tax-free Bonds
Fixed return, subject to being held till maturity
Secure instrument for investment with a low risk factor (G-Sec Bonds for example)
An option of investing in tax-free or taxable Bonds
Trading platform in a bond market
An opportunity for Portfolio diversification
A buffer against market volatility
Bonds are certainly not a term coined in the recent past, but has been in existence for over a century now. First government Bond was floated way back in 1920 by the Province of British India!
Surprising eh, when most of us barely look beyond the traditional investment options our parents always choose.
Better be late than never! Bonds are here to satiate the appetite of an investor.
Just like any other investment, you will have to carefully understand the pros and cons of investing in Bonds, before making an informed decision.
Stay tuned to the following blogs in this series to know nitty gritty of Bond investing.