We’re living in a digital era, where everybody is quick to hop onto the bandwagon of trends. One such trend that has recently caught on is investing. Now when we say investing, the first thought in your mind might just be investing in the stock markets. This could be a result of the frequent announcements of IPOs, Mutual Fund NFOs, or the growing presence of trading platforms. However, ‘Bonds as an alternative investment option remain an underdog.
Now the next logical question to pop in your mind would be - what are bonds exactly, and why have they been in the shadows, right?
Just as we borrow money for various needs, an organization may also borrow funds to fulfil its financial needs for various purposes such as expansion, infrastructure development, working capital requirements, etc. The organization can do so by issuing bonds (becoming the issuer) to seek interested investors (the lenders).
You may wonder - what’s in it for the investor?
In return for the investment made by the investor, the issuer shall then add an interest amount over the principal amount invested. These interest payments are usually fixed in nature and follow a predetermined schedule. Thus, bonds are also commonly known as fixed-income instruments.
So why are bonds still alien to us?
It’s mainly because bonds as investment instruments were only accessible to HNIs (High Net-worth Individuals) due to their high-ticket size (i.e. the minimum investment amount was very high). However, in recent years, bonds have been made accessible to the masses by facilitating investment through small ticket sizes (even as low as a hundred rupees).
Now that we know what bonds are, let’s understand how they differ from our go-to investment avenues such as mutual funds or stocks.
We all have heard stories of people who invested in equity and received massive returns, sometimes overnight too. While that may be the case, equity markets are volatile and can go on a downward track. Due to such market risks, investments can lose their value, denoting high-risk and high-reward situations.
This is how bonds are different; they help you diversify risk in your portfolio and are less volatile than equity. However, one needs to be careful while investing in bonds as if the issuer company runs into trouble, they could default on their obligations and investors can face losses. It is therefore important to do a diligence of the issuer and understand the risks of the product before investing in any security, be it bonds or equity.
In a nutshell, below are a few characteristics of investing in bonds.
- Fixed-income stream
- Diversification from equity and bank deposits
- Lower risk than stocks of the issuing company