Bonds are some of the safest and reliable forms of investments in the capital markets. However, that does not mean you go on buying any bond in the market. Bond investments should be tailored, focusing on investment objectives as well as risk tolerance, among other personal circumstances.
Below are some of the things to look out for before putting any amount to work on bond investments.
Bond Maturity Date
Bonds come with a different maturity date. Depending on your investment strategy, you will first have to ascertain, whether to invest for the short or long haul. If you wish to get your capital soon, then going for a bond with a short-term maturity date would be the right call. The reverse is also true.
Depending on your investment strategy, you might decide on a specific maturity date, to get the invested capital to use in another investment.
Bond Investment Goal
Before investing in any bond, you need to ascertain whether your plan is to accumulate or preserve capital with bond investments. If the goal is to accumulate capital, then you would want to invest in a bond that brings returns above inflation. If inflation is at 2%, then investing in bonds with yields above 2% would be the right call. In this case, corporate bonds would fit the bill.
If your intention is to preserve capital, then going with low-risk bonds with tax benefits would be an ideal call. In this case, municipal bonds, as well as sovereign government bonds, would come in handy.
Read More: Types of Bonds And How To Invest In Bonds
Interest Payment Plan
Bonds differ from one another in the way in which interest payments are made. If you are the kind of investor that wants regular income, in the form of interest payments, then coupon bonds would fit the bill. Such bonds pay regular income in the form of interest payments after say six months.
Zero-coupon bonds, on the other hand, are ideal for investors who don’t want regular payments but one lump sum payment upon maturity. In this case, you get to walk away with the principal as well as lump sum interest payment.
Taxation
Taxes on capital gains is another important thing to consider when it comes to investing in bonds. While some bonds do incur capital gain tax, some do not. It would thus be important to evaluate the amount of taxes you are likely to pay prior to investing in any bond.
How is the Bond Backed?
While bonds are some of the safest forms of investment, they are not immune to issues. For that reason, it is important to consider a bond backer’, and how good their ability is, when it comes to payments. Government-backed bonds are some of the best as they come with the surety of payments. A collapse of a corporation may arouse challenges in payments.
