Bonds are essentially debt instruments issued by companies, governments, or other entities that need to borrow money. When you buy a bond, you are essentially lending money to the issuer, and in return, you receive interest payments at a fixed rate for a set period of time. At the end of that period, the issuer returns your original investment to you.
There are several risks associated with investing in bonds, including credit risk, interest rate risk, and inflation risk. Credit risk refers to the possibility that the issuer will default on its payments, meaning you won't receive all of your interest payments or your original investment back. Interest rate risk refers to the fact that the value of a bond can go down if interest rates rise, because newer bonds will offer higher interest rates and be more attractive to investors. Inflation risk refers to the fact that the purchasing power of your investment can be eroded over time if inflation outpaces the rate of return on your bond.
Debt funds are a type of mutual fund that invests primarily in debt instruments like bonds. Gilt funds are a type of debt fund that invests primarily in government securities, which are considered to be the safest type of bonds because they are backed by the government's ability to tax and print money. Corporate bonds are issued by companies and offer higher interest rates than government bonds, but they also carry a higher level of credit risk.
Overall, bonds and debt funds can be a good way to generate income and diversify your investment portfolio, but it's important to carefully consider the risks involved before investing.
Investing in Bonds | Risks, Rewards & Everything you need to know | A Beginner's Guide
References : Investopedia, Investment Insights
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