A Beginner’s Guide To Investing In Bonds: When And How To Invest In Bonds
Bonds are a relatively low-risk investment mode, and numerous financial experts recommend investing in bonds to acquire a hedge against the uncertainty and volatility of the stock market.
Bonds are typically debt securities issued by various government corporations and agencies that are searching for ways to raise money. If you are purchasing a bond, in simple words, you are lending money to the issuer as a loan, and you will receive a full repayment on the date the bond matures and you will also earn a recurring interest payment. But before you invest in bonds, it is vital to know how to invest in bonds, and how you can use them in your investment strategy.
How to purchase bonds
Most bonds are not traded publicly unlike stocks. Instead, bonds are traded over the counter, which mandates the use of a broker. However, some exceptions do not require you to go through an intermediary.
Investment in bonds is undertaken directly. You must have a Trading and Demat Account with the bank. You can directly register yourself on the stock exchange for knowing the bids and there is no need to look out for a stockbroker. You just need to submit the order on the exchange and purchase the Bonds and hold them in your Demat Account.
Purchase government bonds through stockbrokers
On the other hand, Government Bonds can be purchased only through stockbrokers. For this, you are required to participate through non-competitive bidding. Therefore, for government bonds, the yield is decided on the basis of the bids made by all the institutional investors, and your Bond allocation depends on the market yield.
Invest when you want to generate income
Bonds do not offer the same returns as stocks, but bonds can offer regular income payments, which is helpful during retirement age.
Invest when you want to create a more conservative portfolio
As your retirement nears, it is more vital to conserve the wealth that you have accumulated than maximize it. This is why financial advisors generally recommend investing more in bonds than stocks.
Invest in bonds if you want diversification
Even if your investment goal is to enjoy a comfortable retirement that may be decades away, it is still a better idea to invest a small amount in bonds to diversify your portfolio. That way you will not have to completely rely on stocks.
If you have already retired or nearing retirement, you may not have the time to look out for stock market downturns, in such cases, bonds are a safer mode of investment for your money.