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The advantages of including bonds in your investment portfolio

by , 09 January 2015

When you think about investing, the first thing that may spring to mind is stocks. But that isn't the only vehicle to invest in.

You can look to fixed-interest instruments like bonds.

So what are bonds? And what are the advantages of having exposure to bonds in your investment portfolio?

Read on to find out…


What are bonds?


Bonds are a way for governments and big companies to raise money. When you buy a bond, you’re effectively lending money to the issuer of the bond.

Let’s say you decide to invest in retail savings bonds. When you buy these, you’re lending the government money.

In return for lending that money, you receive fixed interest payments, generally twice a year. And at the end of the term of the bond, you receive your initial amount back.


What are the advantages of investing in bonds?


Bonds are a ‘safer’ investment option to investing in shares. That’s particularly so if you buy government bonds. It’s unlikely the government will default on paying you interest and the bond amount back.

When it comes to bonds issues by companies, the risk of default can vary. Generally speaking, the higher the interest rate payable on bonds, the higher the risk of default.

The interest payments you receive from holding bonds can be a lot less than what sort of gains you could make from investing in shares.

But with this comes the perceived lower risk that bonds carry

As well as investing in government retail savings bonds, you could invest in a fixed-income unit trust for example. The fund manager invests into bonds issued by the government and large corporations.

Including bonds as part of your investment portfolio can reduce your overall risk and add diversification. And you know that you’ll receive the interest payments through the life of the bond too.

So there you have it, the advantages of including bonds in your investment portfolio

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The advantages of including bonds in your investment portfolio
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