Investment Basics Part Six: Bonds
Our Investment Basics mini-series has de-mystified some of the most common options for individuals interested in investing as part of their overall personal financial strategy.
What are Bonds?
Unlike the other investment types covered in this mini-series, bonds do not involve the purchase of shares. Because of this, and the fact that bonds tend to be seen as lower-risk than share-based investments, bonds are often seen as a component of a balanced investment portfolio.
Bonds are financial products offered for sale by governments and companies who want to raise funds. Investors purchase these bonds, providing the needed investment, in return for a promise of being repaid a higher amount at a future date. Essentially, bonds act as an ‘IOU’ from the issuer to the purchaser. Bond values can fluctuate in response to changing interest rates.
The fixed income offered by bonds is valued as a steady, reliable income by some investors, who also find the low level of risk appealing. Bonds are not, however, risk free, as the issuer is not guaranteed to be able to make the promised repayments. Financially stable governments are seen as the preferred issuers of bonds, being less likely to default on repayments. Bonds issued by the UK Government are known as gilts.
When constructing a well-diversified portfolio, the inclusion of bonds assists in balancing the overall risk and reduce the potential volatility. Historically, bonds have provided a level of protection against equites which have a higher level of risk, however, this is dependent on financial market conditions.
When considering any investment, it’s important to take account of your personal comfort level with economic risk in addition to your overall monetary goals. Our personalised financial planning process is designed to ensure your finances are arranged to suit your own unique circumstances. Why not arrange a free, no-obligation chat today to explore how investments might support your long-term investment plans?