Bond investments are highly recommended by investment advisers. Generally, they are considered to be a defensive way of investing your money. Bonds are loans advanced by small investors to large corporations for the purpose of expanding their existing business capacities.
In return of the money, companies promise a steady and healthy returns to investors, which is most probably a fixed return. The company is legally obligated to pay a fixed percentage of return, irrespective of whether it makes profits or not. So, the investors stand to gain from such bond investments.
Mostly, money is raised through issuing of bonds by government companies having rapid expansion plans. There are some companies in the private sector too, who have come up with the option of investing in bonds for retail investors.
Other forms of investments such as stock market or real estate investments can be fluctuating in nature and hence the investors stand to incur huge losses. Bond investments are safe and hence investing in this asset class has picked up greatly. However, remember that there are risks in all types of investing and bond investment risks cannot be neglected.
Risks Associated with Bond Investments
The most prominent risk of bond investing can be the market risk. This can be a phase where the entire bond market suffers to a great extent, thus greatly reducing the returns you would be getting.
Among other risks, rising inflation can be a major one. Keeping the prices of commodities stable is a challenge before the governments of all nations. However, it is quite possible that the rate of inflation may increase greatly, especially in developing countries and under such circumstances, the return for bondholders may get reduced.
So, you need to be prepared for these financial crises when you enter the world of investing. However, over the years, bond issuers have taken various steps to increase the return for investors by tackling the rise in inflation systematically.
There is also a risk known as call risk, associated with bond investments. In this kind of risk, the company which issues the bonds can take them back from the investors and close the bonds issue.
By doing so and issuing low-return bonds, the companies can reduce their amount of debt considerably. However, this can be detrimental to the interests of the bondholders as they might not get the returns every year which they were expecting from the issue.
The biggest risks of bond investing can be the non-payment of interest by the company to the bondholders. This can happen in extreme cases, when the financial condition of the company is not at all good enough to pay the bondholders.
Then, there is always the risk of liquidity, which means that bondholders may not be able to find good buyers for their bonds, when they wish to liquidate them. Under such conditions, they may have to sell their bonds at a price which is much lower than the market price, thus causing a loss for the investors.
Though there are risks involved, bond investments generally provide fantastic returns to owners. Stock investing is more risky and hence many people prefer bonds.