The world of investing has continued to evolve with investors looking for investment portfolios that are secure and which can guarantee the best returns. If you are interested in protecting your principal and need to establish a steady flow of income, then you want to consider investing in the bond market rather than stock markets. The amount of income you receive is perhaps the main reason why people would want to invest in bond markets since they generate higher returns compared to stocks, money-market funds or CDs. They offer greater financial security compared to common stocks because issuers are always working hard to ensure that they meet their bond obligations.
An issuer of a corporate bond must ensure that the bondholder is paid well within time or before the dividends are paid to shareholders. In addition, a bond are payable before any payment towards federal or state taxes. Given that payment of a bond is given the highest priority, bondholders are able to rest assured that their investment is safe.
With the ever-changing financial and money market, interest rates have become more volatile and a bond is not exempted from this situation. Therefore, the value of a bond is likely to be affected by the changing interest rates among other macro-economic factors that may prevail. Therefore, the longer the maturity period, the more likely things are projected to go wrong. This is the reason why a bond with a longer maturity is considered more risky, especially where the economic situation is difficult to tell. Therefore, you need to consider those with shorter maturities.
Purchasing Bonds through Mutual Funds
Different varieties of this instruments exist and investors can choose between high quality high-risk or higher-yielding ones that are considered of low quality. However, it is important to vary the maturity periods but the maturities should be approximately four years or less. But you can also choose a bond with higher yields with maturities of more than ten years. Some are tax-free while others are taxable. The choice of the bond market can also affect your potential returns on bonds. By carefully matching and mixing these aspects, you are likely to spread the risk.
Let a Professional Bond Manager Help you
The process of investing in bond the market can be tricky but why should you worry about this when you can let a professional figure out your portfolio for higher returns? Investing in a pre-assembled portfolio through a bond fund allows you to enjoy the convenience. What’s more, you enjoy the benefits of diversification, which guarantees safety. But there is one shortcoming of bond funds—they never mature. While diversification lowers the risk of an investment, the fact that it lacks maturity increases the risk. Your bond manager is supposed to help you maintain the average maturity of the funds at an acceptable level. The period of a bond fund will be a key indicator of how much the value of the bond is likely to change in the wake of changes in interest rates. The value of the fund changes in the opposite direction of the change in interest rates. Assuming that the average duration of 2.8 and that the interest rates increase by 1%, then the value of the bond will fall approximately 2.8%. The longer the maturity period of a bond means a high risk of the bond to fluctuate in value.