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

Bonds in the fixed income category are gaining popularity with retail investors due to their excellent characteristics. It comes with a host of benefits.

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

Main 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 amount of investment in bonds.

• Better yields
Bonds are known to offer better returns than bank FDs and other investment instruments. Some bonds offer yields in the range of 7 to 14%. AAA-rated bonds also offer yields in the range of 6-9% per year.

• Predictable and stable income
You enjoy predictable income. Also, you can get stable returns if the bond is held to maturity. As a bondholder, you receive periodic interest payments payable monthly, quarterly, semi-annually or annually depending on the terms of the bonds.

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

• Risk-reward ratio
Bonds still have a favorable payout ratio compared to other asset classes. It enjoys a higher return compared to term deposits with almost the same risk while it is much safer than stocks with equivalent compound returns.

• Capital protection
In a volatile stock market, capital protection is a major concern, especially for risk-averse individuals. Bonds are known to provide capital protection, safety and liquidity in all circumstances. Within the same category, government bonds and AAA-rated bonds are considered the safest and the degree of safety decreases with lower ratings.

• Portfolio diversification
Bonds can help you diversify your portfolio and balance the risk/reward ratio associated 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 reduce your tax burden. Tax savings bonds enjoy special privileges under Section 80CCF of the Income Tax Act. Investing in tax-exempt bonds helps you earn tax-free income.

Conclusion
The risk/reward ratio of bonds is much more favorable than that of other asset classes.

It enjoys the advantage of giving higher returns like stocks and being safe like fixed deposits while being liquid at all times. Therefore, part of your portfolio should always include bonds.

(Disclaimer: The 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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