We give cash and shares the kind of recognition they deserve as an investment and only perhaps more at times. This said, the bonds often get overlooked and this is a cardinal mistake keeping in mind that bonds are the intermediary asset class, right between cash and shares. Bonds are closer to term deposits than shares, and there is a legal debt obligation related to bonds which make it difficult for companies to go volte-face on their ‘interest’ or ‘capital’ promise.
Bonds are low-risk ventures
Bonds are pretty low-risk ventures and are a great foil for investors with huge cash base. Typically, their returns are lower, though they function like making your money work in a safe environment. A corporate bond portfolio is likely to return you 5% wherein certain investment grade bonds also offer 6%. This is way above 4% or less presently offered by the term deposits.
Advantage of bonds over term deposits
Bonds have various advantages over term deposits. As a first, they are tradable investments, which means that you do not have to hold them till the maturity date. In general, they can be traded in the T+3 working day style.
Bonds pay interest a lot more frequently than the term deposits and because interest is compounded more times, the principal becomes higher than the term deposits by some distance. There are bonds directly linked to inflation and in being so, they are completely hedged against inflation. A great tool in the portfolio artillery!
Bonds can be had cheaper now
Presently, bonds can be bought in small parcels for as cheap as $10,000 and this is a clear departure from yesteryears. Naturally, the scope has increased quite a lot for small investors and if you are a part of this line-up you can really make your money work for you.