Bonds: The Safest Paradise for Your Money
Most people associate investments with high risk – a win or lose game. But it is possible to invest while preserving your capital and still make returns. The solution is investing in bonds.
A bond is a financial instrument that the government, companies, and other institutions use to obtain cash from investors in exchange for interest, which can be paid periodically. The bond comes with a defined period. After its maturity, the investor receives the original sum back.
Advantages of Bonds
Bonds come with a number of benefits that make them safe, especially for new investors or those unwilling to take a high level of risk.
1. You Make an Income
With bonds, you make an income through interest payments, known as coupons. The payments are typically made every six months, creating a predictable income. This cash flow makes it an excellent investment choice for retirement. You can also resell the bond at a higher price than you bought it and make a profit.
2. Capital Preservation
If you are looking to invest without losing your capital, go for bonds. At the end of the given period, you will get the initial amount invested. The only possibility of losing is if the entity defaults. You can avoid this by carrying out background research on the company’s financial health first before investing your money and choosing investment-grade bonds.
3. They Offer Diversification
Bonds have a negative correlation to other asset classes. It makes them great for diversifying a portfolio. Diversification of a portfolio leads to better risk-adjusted returns for investors. Bonds are less volatile than other forms of assets and will protect your returns when the stock market is falling.
4. They Come with Tax Benefits
When seeking to reduce your tax burden, some bonds can provide this advantage. There is no tax charged on the interest paid on municipal bonds at the federal level. It is also zero on the state level for municipal bonds issued in the state you reside in. Interest from U.S. treasuries is also tax-free at the state and local levels.
Can you Day Trade in Bonds?
Day trading involves opening and closing several trade positions during the day and ensuring they are all closed at the end of the day. The aim is to capitalize on the small price movements of the highly liquid investment assets.
If you are a day trader, you can conveniently trade bonds using Bond ETFs (Exchange-traded Fund). Bond ETFs are highly liquid and trade as an equity product.
Bond ETFs exclusively carry various bonds, such as U.S Treasuries and corporate bonds, both long-term and short-term.
Conclusion
If you are risk-averse or just starting as an investor, bonds provide the safest option. They come with a predictable income, and you get your initial investment back at maturity.
Bonds also provide diversification to the portfolio, protecting you from the bumps other asset classes present. As a plus, you get to reduce your tax burden if you invest in municipal bonds and U.S. treasuries.