Amidst the recent unpredictable conditions of the market, we gradually see the worth of equities fading away, and bonds coming up as the next big thing. Bonds offer relatively stable returns, which are much needed today. Investors should have an idea of some factors before they go on to invest in bonds.
Returns
The asset class offers an annual interest rate of 8-11% , and a return, which is as good as that offered by bank deposits. However, higher the rates mean higher the risks, and this needs to be looked into by investors before investing.
Ratings are Not Everything
Ratings are not the only answer to the number and kind of risks involved in bonds. There could be newer and worse risks at later stages. For example, in case of any restructuring or acquisition wanted by the issuer, the debt burden is likely to get bigger gradually. In other cases, ratings may not be updated with the company’s credit profile. Such are some flaws with ratings, and investors should look beyond these ratings.
Premature Exit
Pre mature exit might expose the investors to the unstable interest rates, and would not be beneficial. Moreover, the liquidity of these bonds is the another important pointer that ought to be taken into consideration while planning the exit .
Risk Return Balance
The most important mantra in investment is to find that one perfect asset, which has the most balanced risk-return proportion. For example, certain types of bonds known as ‘putable bonds’ give more rights to the investors, and thus their coupon rates are lower. Such factors need to be considered before investing.
Investing is no child’s play and it must be done with utmost care, caution, and advice. You do not want all your money going down the drain because of that little extra return coming at the cost of a huge row of risks. Invest wisely!
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