All the rich people in the world definitely invest in bonds. Because they all know that anything can happen in the stock market and They cannot remain rich through fixed deposit scheme. That is why they definitely invest some part of their investment in bonds. Investing in bonds is safer than investing in the stock market. Yes, bonds do not give as much return as the stock market, but your money will not sink.
The best thing is that the return received by investing in bonds is more than the bank’s fixed deposit scheme. Generally, it is 7 to 12 percent.
How to invest in bonds?
If you are not happy with the returns of fixed deposit, then you can invest in bonds.
Bonds are considered to be the safest way of investment. But there are many types of risk factors in bonds too, so to reduce the risk and increase the returns, we will discuss about it further.
So let’s know what is the best way to invest in bonds?
Investors can invest in bonds in two ways, first through the primary market and second through the secondary market.
Primary Market –
When a company issues bonds for the first time, the investor buys the bonds directly from the company. This is called the primary market. In the primary market, the investor buys bonds from the company’s website or from any of its nearest branch offices.
Secondary Market –
When an investor buys or sells a company’s bonds from another investor instead of buying them directly from the company, it is called the secondary market. In the secondary market, the investor takes the help of a third party website to buy or sell bonds where all types of bonds are listed. With the help of third party tools, it is very easy to search bonds and all the information related to bonds can also be read easily.
Type of Risk in Bonds
Before investing in bonds, we should know what kind of risks are there in bonds. So that we can reduce our risk and increase our profit. There are two types of risks in bonds, Credit Risk and Interest Rate Risk. Never compromise with these two risks while investing in bonds.
Credit Risk:
All bonds have some level of risk due to which you may lose part or all of the income and if the company defaults, you may lose part or all of the principal amount invested. To reduce these risks, credit rating is done on the basis of the company’s debt instrument. It is understood that the better the credit rating, the less likely the company is to default. These ratings range from triple A to D. Ratings above triple B are considered good.
So it is always advisable to invest in a company whose credit rating is AAA.
Interest rate risk:
Generally it has been observed that whenever the interest rate in the market has increased, the market value of the bond has fallen. This risk has been observed in all types of bonds. The market has an impact on interest rates but these changes have not happened on a very large scale. Very minor fluctuations have been seen in interest rates. However, it is not necessary that what has happened in the past will happen in the future as well.
Generally, it has been observed that whenever the interest rate has increased in the market, the market value of the bond has fallen. This risk has been seen in all types of bonds. The market has an impact on interest rates but these changes have not happened on a very large scale. Very minor fluctuations have been seen in interest rates. However, it is not necessary that what has happened in the past will happen in the future as well.
Before investing in bonds, it is very important for you to know about Bonds Coupon, Face Value and Bond yields. Investment in bonds is done only after comparing the bond coupon, face value and bond yield.
Note
What is the meaning of coupon in bonds?
A bond is a debt instrument. Whenever a company or government needs money, it issues bonds to the public instead of taking a loan from the bank. So that he can get money at a lower interest rate. In this, the company or the government gives a fixed interest amount to the bond holder on the basis of the coupon rate.
The rate at which the bond holder gets the interest amount is called the coupon. For example, if the coupon of a $100 bond is 9%, then the bond investor will receive $9 annually.
The annual interest paid on the bond is called the coupon.
What is face value in bonds?
When a company issues bonds for the first time, a fixed value of those bonds is kept which is called the face value. For example, if a company sets the price of its bond at $100, then it is said that its face value is $100. The same company can issue many bonds whose face value can also be different.
What is bond yield?
Bonds are a debt instrument that corporates and governments issue to complete their projects. Like corporates for their new building and the government for the new highway. In this, the investor invests his money at a fixed interest rate for a fixed period. Then the company pays the loan and interest to the investor during the bond period. The return that the investor gets on a bond is called bond yield.
The issuing company is bound to pay a fixed interest amount every month or half-yearly or yearly depending on an agreement.
Conclusion:
Keep these 4 things in mind before investing in bonds
- The credit rating of the bonds should not be less than AAA,
- Before investing in bonds, compare Coupon Rate, Face Value and Bond Yield.
- Before investing in bonds, make sure that you are comfortable with long term investment.
- Also make sure after how much time interval you want to receive the interest amount – every month or half-yearly or yearly.
If you invest in bonds keeping these things in mind, then you will definitely be able to get good profit from your investment.
I hope you will be satisfied with the information given by me. If you have any questions related to bonds, then you can write in the comment.