Balance with Bonds

A bond is a debt security that can be issued by a government, local authority or company. Investors who buy bonds are loaning the issuer money in return for interest and also the return of capital at a pre-determined maturity date.

Bonds are also known as fixed income securities as they pay the interest amount stipulated in the contract. This will be at regular, periodic intervals until the date of maturity.

A lower-risk investment than shares, bonds are seen as a good way to balance a portfolio and offer several benefits.

The fixed income allows the investor to forecast returns much more accurately than with shares that pay a dividend. This enables the investor to meet monthly expenses, especially if income from investments is required to cover outgoings.

Bonds provide portfolio diversification across a range of asset classes rather than just within an asset class. The theory is that such diversification protects the portfolio from volatility in the market, as they react differently to shares on economic data announcements.

Bonds generally experience less price volatility than stocks, providing stability in a portfolio.

The total return is largely made up of a basic return from the interest receivable. However due to bonds being traded in a secondary market there is scope to se capital gains also. This may be when the stock market is going through a turbulent patch and other investors buy into bonds looking for a safer home for their funds.

Whilst bonds are seen by many as a steady investment, for those looking to balance a stock portfolio or requiring a consistent income, bonds have a key role to play.