One of the most effective methods to accumulate funds is through investments in bonds and debentures. Usually, businesses try to accumulate funds for projects, by issuing a variety of bonds. Bonds are often used to fulfil short-term urgent capital requirements and help support the cash crunch faced by companies.
Investors typically invest in bonds online as such platforms are considered safe, secure, and convenient, and tend to follow a transparent process. Only in rare cases does a bondholder experience any default. Bonds are traded by way of contract between the issuer and borrower for a fixed maturity period and bond interest is the benefit derived by the bondholder. Though bonds may be secured through a collateral, debentures can be both secured and unsecured.
This brings us to the topic of debentures. Debentures tend to offer higher rates of interest as they are generally unsecured in nature.
Let’s understand how investments in bonds and debentures can provide benefits to investors:
- Principal amount remains safe and secure
If you have any extra income and wish to park it in a safe place and earn some decent return, then you can turn to bonds and debentures. Unlike with the stock market, your investment value will not fluctuate here, and the principal amount will remain safe. You will also enjoy interest and the higher the credit rating of a bond, such as AAA, the more you can be assured of the creditworthiness of the bond issuer.
- Generate stable, fixed returns
Stability of income is sought by many, practised only by a few. Debentures and bonds allow you to earn fixed returns at regular intervals. Bond issuers pay interest – at either a fixed or floating rate – at a predetermined payment schedule. This means you have a guarantee of receiving substantial income which can also help in case of financial emergencies. This interest income can also be reinvested by you in other assets to build your portfolio.
- Witness steady financial growth
The most attractive part of investments in bonds like treasury bonds, sovereign gold bonds, government bonds, and corporate bonds is that, unlike shares, these are not affected by market volatility. Even after a wait of long tenures, shares may not guarantee returns as desired. On the contrary, bonds and debentures provide a source of income through a steady rate of interest. One can get a fair idea as to how much they can probably earn by the end of tenure.
- Bonds and debentures are comparatively safer than shares
In case a company goes bankrupt or is in some legal/financial crisis, debenture holders still stand at an advantage. It is the company’s duty to rightfully pay back the debenture holders their invested money prior to clearing dues of equity holders. It is an obligation on the company’s end. This means that even during a crisis, money invested would not be foregone.
Bond yield is usually greater than that of debt mutual funds. This is because debt mutual funds guarantee returns in the future based on past performance. However, there is no method to assure that. As bonds and debentures are pure debt instruments, there enters an obligation and regulatory aspect that needs to be fulfilled.
It’s always advisable to include some fixed-income instruments such as bonds and debentures in your portfolio to add a layer of diversification to hedge risk. The proportion of your asset allocation to debt instruments would depend on your risk tolerance and financial goals. You can consult a financial expert to help you determine this.