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Bonds
Bonds are fixed-income investment instruments representing a loan made by an investor to a borrower, typically a corporation or government. Bonds are one of the most stable forms of investment, providing regular income through interest payments.
Key Features of Bonds
- Fixed Returns: Bonds pay a fixed rate of interest (coupon) over their tenure.
- Maturity Date: Bonds have a specific term, after which the principal amount is returned.
- Issuer: Can be issued by governments, municipalities, or corporations.
- Risk and Rating: Bonds come with credit ratings indicating their risk level, issued by agencies like CRISIL, Moody's, or S&P.
Types of Bonds
1. Government Bonds:
- Discretionary PMS: The portfolio manager takes all the investment decisions on behalf of the client.
- Non-Discretionary PMS: The manager provides investment advice, but the client makes the final decisions.
- Advisory PMS: The portfolio manager acts solely as an advisor.
2. Corporate Bonds:
- Issued by companies to raise funds.
- Higher risk than government bonds but usually offer better returns.
3. Municipal Bonds:
- Issued by municipalities to fund public projects.
- Often come with tax benefits.
4. Convertible Bonds:
- Can be converted into a predetermined number of shares of the issuing company.
5. Zero-Coupon Bonds:
- Sold at a discount and do not pay periodic interest. The full value is paid at maturity.
Benefits of Investing in Bonds
- Steady Income: Regular interest payments provide predictable cash flow.
- Safety: Lower risk compared to equities, especially with government bonds.
- Portfolio Diversification: Bonds reduce overall portfolio risk due to their inverse relationship with equities.
- Tax Efficiency: Some bonds offer tax exemptions or benefits, such as municipal or infrastructure bonds.
Risks Associated with Bonds
- Interest Rate Risk: Rising interest rates can lower bond prices.
- Credit Risk: The issuer might default on interest or principal payments.
- Inflation Risk: Returns may not keep up with inflation, reducing purchasing power.
How Bonds Fit in Financial Planning
- For Retirement Planning: Bonds provide stable returns and are less volatile.
- For Risk-Averse Investors: Ideal for those seeking steady and secure income.
- For Diversification: Balances risk in a portfolio heavy on equity investments.
