5 reasons why you should invest in bonds
What's the story
If you're looking to diversify your investment portfolio, investing in bonds can be a good call.
Bonds come with a set of benefits that can attract both conservative and aggressive investors alike.
Knowing these perks can help you make informed choices regarding the allocation of your resources.
Here, we take a look at five major benefits of investing in bonds that every investor must know about.
Income stability
Steady income stream
Bonds offer a reliable income source through periodic interest payments, aka coupon payments.
This makes them a good bet for people looking for steady cash flow, like retirees or anyone saving up for future expenditures.
The fact that these payments are fixed enables them to maintain a stable income and budget their expenses better.
Risk mitigation
Lower risk compared to stocks
Since bonds reflect a loan to the issuer instead of an ownership stake, they're inherently less risky than stocks.
In case of financial trouble, bondholders are prioritized over shareholders when it comes to repayment.
This lower risk profile makes bonds an appealing choice for risk-averse investors looking to preserve capital while still earning returns.
Diversification strategy
Portfolio diversification benefits
Including bonds in your investment portfolio can increase diversification by balancing the volatility that comes with stocks and other high-risk assets.
Bonds tend to have a low correlation with equities, which means they may perform differently under similar market conditions.
This diversification can help lower overall portfolio risk and increase long-term returns.
Tax efficiency
Tax advantages on certain bonds
Certain kinds of bonds such as municipal bonds also provide tax benefits that can make them more appealing.
The interest earned on municipal bonds is usually exempt from federal income tax in US. It can also be exempted from state taxes if you live in the issuing state.
These tax benefits make certain bonds very attractive for investors in higher tax brackets looking for efficient ways to manage their taxable income.
Capital safety
Preservation of capital investment
Bonds are famous for capital preservation owing to their fixed maturity dates and repayment structures.
When held till maturity, most bonds return the principal invested along with interest earnings over time.
This particularity reassures investors looking to preserve their initial investment while earning steady returns during the bond's term.