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Four reasons why you should include bonds in your investment portfolio

by , 08 May 2015

Investing in bonds may not offer you the level of potential gains of investing in stocks, but they play an important role in your portfolio.

So what are bonds? Why should you invest in them? And how can you invest in bonds?

Read on to find out…

What are bonds?

Bonds are fixed-interest securities. When you buy bonds, you’re lending the issuer money. In return for this loan, you’ll receive interest payments twice a year.

The main bond issuers are governments and corporations. In South Africa, bonds trade on the Johannesburg Stock Exchange’s Debt Market.

Why you should invest in bonds

Investing in fixed-interest securities like bonds reduces the risk of your investment portfolio.

Here’s why…

Reason #1:
As the prices of bonds fluctuate less than the prices of shares, they’re a less volatile investment.

Bonds don’t follow the performance of shares and this helps to lower your overall investment risk.

Reason #2:
The majority of the return you receive from bonds is in the form of fixed-interest, so you know you’re going to receive a specific level of income.

Reason #3:
The fixed-interest rate from bonds is usually better than what you can earn on cash deposits in the bank.

Reason #4:
Many bonds have a low credit risk, especially government bonds.

If you see bonds offering high rates of interest, they’re likely to be of higher risk. This means there’s a higher chance of default and you not receiving interest payment or the principal amount back when the bond matures.

How to invest in bonds

You have many options when it comes to investing in bonds.

One of the easiest ways is to invest in RSA Retail Savings Bonds. Or you can look to bond funds via either unit trusts or exchange traded funds.

Buying bonds directly from the Debt Market through your stock broker is another consideration, but this tends to require a large investment amount.

So there you have it. Four reasons why you should include bonds in your investment portfolio.

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Four reasons why you should include bonds in your investment portfolio
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