Is it Safe to Invest in Bonds?

Financial planning is considered as a foundation to financially safe and secure future. Right from our childhood we are taught the concept of savings for the rainy day. Today we want to not only save but also to increase our earning. This article answers whether bonds are considered as a safety net or is this instrument not beneficial to an investor. Whether you are working or retiring, investment is a top priority issue in your mind. In order to prepare for future shocks, it's important to make your money grow. Simply storing your money in bank is not a wise option. Now it's more crucial to invest in such avenues which guarantee you maximum returns. Consult a financial planner and the first thing he will tell you is your investment should have right blend of equity and debts. Basically, this right blend or right portfolio is achieved by determining how much money are you willing to put, what kind of management strategy are you planning to follow and percentage of stock which you are going to diversify in the options you choose.

The most crucial decision which you want to take in terms of your portfolio is the risk involved in each segment. Usually the time horizon and risk tolerance is taken into account. Also, the type of investment choices in your portfolio like the right mix of stocks, bonds and cash equivalents are necessary for enhancing the growth potential. According to financial analysts, bonds are favored by the retired or less risk prone people. In fact, bonds offer less volatility than equity and a consistent growth in income.

Allocating your Resources
The question which springs up in minds of investors is whether bond is a safe haven investment. In midst of growing inflation, unemployment and financial markets spiraling downwards, which instrument can be effective enough to guarantee a better return. One instrument which has been attractive in terms of generating consistent return is the bond. According to financial planners, bonds should be in everyone's portfolio even though the money which you should allocate depends on your decision and age too. Like a young professional can have less money invested in bonds whereas a person nearing retirement could have a major proportion invested in bonds.

Choosing the Right Path
There are many types of bonds of which the most preferred ones are convertible, treasury, US savings, corporate and mortgage backed bonds. Buying an individual bond is most preferred by the investors who want to invest less in bonds whereas if a large amount is at stake bond funds serve as a best answer. As per Barclay's Capital, corporate bonds have returned a positive return than the equity market offsetting the bear market which was experienced lately. Even though U.S. treasury bonds do not carry any risks and are suitable to those investors who are less risk prone, there are other types of high yield bonds which do carry higher return but with substantial risks.

Bond price is another determining factor while purchasing bonds. If bonds are kept till it's maturity date then the investor receives the full face value. But if the investor has invested in bond funds then price fluctuations have to be taken into consideration. Also if the investor wishes to sell the bond in secondary market before the due date then he has to encounter price fluctuations.

External Factors affecting Bond Prices
Bonds have acted as safe investment whenever the equity market has been weak. Investors in U.S. have parked over billions of dollars since 2009. But external factors such as inflation, rising interest prices and financial health of the issuer cause the bond prices to fluctuate more. Financial planners advise that investing in bond fund is better than investing in individual fund provided you are well aware of the risks the former holds. The positive aspect of investing in bonds is that your money will not disappear as in the equity market but will certainly face price reduction if inflation soars up and vice-versa. Also in terms of the economic condition, say in event of recession, people preferred government bonds over corporate bonds.

In terms of reward in corporate bonds, the investor will certainly get lower return than an equity shareholder but the principal will be returned by the issuer of bond in event of bankruptcy of the firm. Short term bonds are more advantageous than long term bonds as the former ones are free from interest rate fluctuations. According to the current scenario the interest rate has stayed low, encouraging investors to invest in corporate bonds and earn higher returns.

Author: Reshu Mehrotra