Learn with ETMarkets: What are the advantages of investing in bonds?

Learn with ETMarkets: What are the advantages of investing in bonds?

Bonds in the fixed-income security category are gaining importance among retail investors because of their great features. It comes with a host of advantages.

Here we will discuss some of the advantages that may encourage you to include bonds in your portfolio.

Key advantages of investing in bonds

• Lower initial investment
You can start investing in bonds with a minimum amount as low as Rs 1000/- (face value). You can increase the amount in multiples of face value. There is no limit to the maximum investment amount in bonds.

• Better Returns
Bonds are known to offer better returns than bANK FDs and other investment instruments. A few bonds offer returns in the range of 7 to 14%. The AAA-rated bonds are also offering returns in the range of 6-9% annually.

• Predictable and Stable Income
You get the benefit of income which is predictable. Also, you can earn stable returns if the bond is held till maturity. As a bondholder, you get periodic interest payments payable monthly, quarterly, half-yearly, or yearly based on the terms of bonds.

• High liquidity
Bonds offer high liquidity compared to FDs as it helps you buy or sell them with great ease in the secondary market. It is known to provide the advantage of selling bonds without a substantial change in price.

• Risk-reward ratio
Bonds always have a favourable reward ratio as compared to other asset classes. It enjoys a higher return compared to fixed deposits at almost the same risk while it is much safer than equity with equivalent compound returns.

• Capital Protection
In the volatile stock market, capital protection is a major concern specifically for risk-averse individuals. Bonds are known to provide capital protection, safety, and liquidity under all circumstances. Under the same category, government bonds and AAA-rated bonds are considered to be the safest and the degree of safety goes down with lower ratings.

• Portfolio diversification
Bonds can help you diversify your portfolio and balance the risk-reward involved with different assets. It can also prove to be a great addition to your investment portfolio.

• Tax Benefit
A few specific types of bonds can help you reduce your tax burden. Tax-saving bonds enjoy special privileges under Section 80CCF of the Income Tax Act. Investment in tax-free bonds helps you earn tax-free income.

Conclusion
The risk-to-reward ratio on bonds is much more favourable compared to other asset classes.

It enjoys the benefit of giving higher returns like equities and being safe like fixed deposits while being liquid at any point in time. Hence, a part of your portfolio should always include bonds.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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