Bond Investments are a halo of safety or not? - GoldenPi

Bond Investments are a halo of safety or not?

Bonds are considered a safe haven, but bonds do come with a couple of risks.

The term “Risk in Bond Investment“ sounds like an oxymoron. Because once we hear the word “Bonds”, what comes to our mind is: bonds are debt investments, they give fixed returns and are safe.

Default Risk: One of the key risks of investing in Bonds is the risk of facing non-payment of interest or principal or both by the Bond issuer. This loss to the bond buyer is called the default risk. It can happen if the bond issuer runs into financial trouble and is incapable of paying. Hence, while picking up bonds, it is especially important to invest in entities that have sound financial performance.

Liquidity Risk: Liquidity is the ease of selling off a bond in the market and getting cash in return. If you find difficulty in selling your security/ Bond in the market, you have to lower your sell price to get potential buyers. This risk of monetary loss due to less number of buyers/ low demand for a given security is termed as Liquidity Risk.

How to proceed?

Resolution for default risk: Go for “AAA” rated bonds, these bonds are less risky than other lowerrated bonds.

Liquidity risk and Interest rate risk would not come into picture if you plan to hold bonds till maturity.

This is called the HTM strategy (HTM).In case you want to sell bonds before maturity, the interest rate risk is still minimum compared to the risk associated with other securities. Liquidity risk can be handled efficiently with the help of the latest connective technological innovations and Liquidity Intelligence would be a boon to sellers.

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