What are the Benefits and Risks
of Bonds Investing?
Bonds investing is a great alternative for investors needing income. You
can also gain income from dividend paying stocks, but the bonds investor
will experience more principle stability and most of the time, more
income.
Bonds investing can give you great income, but as interest rates
fluctuate, so will the value of your bonds. When interest rates are
going lower, your bonds will go up in value. Conversely, when interest
rates are going higher, your bonds will be going down in value. The
shorter the maturity of the bond, the less the value will be affected.
Long maturity bonds can suffer greatly when interest rates are rising.
There are also many different kinds of bonds available for purchase.
Additionally, you can purchase either individual bonds, bond Mutual
Funds, or Unit Trusts. Depending on what kind of vehicle and type you
choose for bonds investing, you can control the risks involved.
Mutual Funds are a simple and convenient way to buy
bonds. You get professional selection and management, as well as monthly
income checks. You can also reinvest the interest income in additional
mutual fund shares if you do not immediately need the income. Units
Trusts combine a small number of bonds which are picked by
professionals, so you are buying a package of bonds instead of a single
issue.
With bonds investing there are several types of risks involved. As
discussed above, there is principle fluctuation risk due to interest
rate fluctuations. Also, there is default risk with Corporate Bonds,
Municipal Bonds, and GNMA Bonds, but not with US Treasuries.
When the economy is slowing, the default rate of the Corporate Bonds can
rise, lowering the price of these bonds. GMNA Bonds are how mortgages
are financed. When you own a GNMA, you are effectively the lender of a
mortgage. When people default on paying their mortgage, the value of
your GNMA can be negatively affected and can go down in value. However,
since these bonds are backed by quasi government agencies, the risk is
limited in nature. US Treasuries are considered the safest investments,
since they are back by the full faith and credit of the United States of
America.
The rate of interest you will get by bonds
investing is determined by many factors. Generally the more risk you
take, the higher the interest rate.
Contact a professional financial advisor so you can be assured you
are buying the right one for your particular needs.
