W hy Bond Investing Should Be a Part of Your Portfolio? When you begin investing, there is a chance that the vast majority of your investments are in equities. However, there is another type of investment that may be well worth your capital – bonds. Here, we will take a look at what bonds are, what type of bonds are available and why you may want to consider bonds as part of your portfolio.
What are Bonds?
Bonds are a fixed income instrument which represents a loan made by an investor to a borrower. In a way, you are loaning a company or a government your money and you are being paid your money back with interest. As the owner of the bond, you become a creditor or debt holder.
Types of Bonds
There are a number of different types of bonds available. Therefore, you have the opportunity to become a creditor with a number of different entities. Here’s a look at three major types of bond categories.
1). Corporate Bonds
Corporate bonds are bonds that are issued by companies. A company may issue bonds to fund a major project or expansion of their operations. Corporate bonds tend to be a little riskier than other types of bonds because companies generally have a higher risk of default versus other entities.
2). Government Bonds
Government bonds are bonds issued by the Federal government and other sovereign countries. Some of the most stable bonds on the planet are US government bonds. It is quite common for people on fixed incomes to put a significant amount of their funds into US Treasury bonds.
3). Municipal Bonds
Municipal bonds are issued by state, county and local governments to fund specific projects. As an example, the funding of highways, road expansions or utility projects will be funded by bond sales.
Advantages of Bonds
There are a number of reasons why you will want to consider an investment in bonds. Here’s a look at three major advantages of bond investing.
1). Provide a fixed income return
Bonds provide a fixed income return on your investment. This can be advantageous if you are retired and you don’t want to deal with the unpredictable returns from the stock market.
2). Uncorrelated with the stock market
The bond market is also generally uncorrelated with the stock market. That means that diversifying some money into bonds can help smooth out returns over the long run.
3). Some bonds offer tax free turns
Finally, there are some bonds that provide for completely tax free returns such as US Treasury bonds and some municipal bonds. Additionally, municipal bonds are generally free of taxes in the state where they are issued.
Getting Started With Bond Investing
Bond investing can provide you with excellent diversification as well as a fixed income that may be free of taxation. Be sure to carefully consider the pros and cons of bond investing before you make your final investing decision.