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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.
DISCLAIMER
© 2025 Big Banyan Financial (BBFIN) | Led by Mannu Sahni, Certified Financial Goal Planner.
Information provided is for general awareness and educational purposes only and does not constitute investment or insurance advice. Mutual Funds are subject to market risks; read scheme documents carefully before investing.
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