Minggu, 31 Januari 2010

Investing in Bonds

Investing in Bonds

Bonds constitute the major part of anyone’s portfolio. The World’s Bond Market is worth of Trillions of Dollars which is much more than the Equity market of the world. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS.

So you can imagine that How big the Bond Market is?

What Are Bonds & How they Work?

Let us understand the Bonds in simple language. Well, whenever a Corporation (Private Entity) or the Government wants to borrow money to expand its various projects or fuel its growth, it issues the Bonds also known as Debt Paper. Now, the Individuals, Investors, Other Corporations & The Governments from all around the world buy these bonds and finance the bond issuer.

Say for Example if you buy $ 100 Bond of J P Morgan than it means that you are lending $ 100 to J P Morgan. Suppose if you buy $ 10,000 worth of US Treasury Bonds than it means that the US Government is borrowing $ 10,000 from you.

Bond Ratings -

Corporate Bonds are rated from AAA to CCC Grades according to its credit worthiness. High Quality Bonds are graded as AAA while poorest quality bonds are traded as CCC. However, AAA Rated bonds give you the lowest yield while the CCC rated bonds will give you the highest yield.

Theoretically, the world has assumed that the US Treasury Bonds can never ever default. Because the Government of USA can never default in it’s payments and that’s why the US Treasury Bonds are the safest bonds in the world and that’s why they are the lowest yield bonds in the world.

Bond Mutual Funds -

There are so many Bonds available in the market that, choosing the best bonds itself is a job.  And that’s why the concept of mutual funds came into exists. Here the fund manager of the mutual fund invest in bonds on behalf of you.

Bond Allocation in Portfolio -

Any Portfolio should have 2 Basic Components – Equity & Debt (Bonds). Now, Bond Allocation in any portfolio should be based on the age of the investor. If you are near your retirement than you should allocate more money in Bonds and less in the Equity and if your age is young and the retirement is away, you should invest more in equity and less in bonds.

So Start Investing in Bonds because any portfolio is not the portfolio without Equity & Debt Components.

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