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Highlights
Bonds are the most common form of fixed-income securities.
Bonds are loans from an investor to companies or governments.
Those who seek regular income can opt for debt.
Bonds are known to be one of the key investments for investors following the income investing philosophy. Those who seek regular income can opt for debt.
However, debt investing has its own complexities and comes with several nuances. Investors can face several risks while parking their money into debt.
What are bonds?
Bonds are loans from investors to companies or governments, which use these funds to finance projects and fund operations. These can range from municipal bonds, and commercial bonds to savings and treasury bonds. By investing in debt, investors receive periodic payments based on the promised interest rate.
Three bond management strategies
Buy-and-hold strategy
This is passive bond management which works towards maximising income-generating attributes of bonds. Investors using the buy-and-hold strategy purchase and hold bonds till maturity. Meanwhile, the income earned could be deployed towards external financing needs. Investors may also reinvest the income in other bonds or assets.
Active bond strategy
Investors make bets on the future rather than being satisfied with potentially lower returns under the active bond strategy. In short, the active bond strategy seeks to maximise investors’ returns. A few examples of the strategy include interest rate anticipation, valuation, and multiple interest rate scenarios.
Immunisation bond strategy
Immunisation bond strategy can be said to be a combination of both passive and active strategies mentioned above. Such investors are known to bet on the future than getting satisfied with potentially lower returns through passive investing. The financial portfolio is kept invested irrespective of outside factors such as interest rate changes.
Indexing bond strategy
This strategy offers returns to investors on the basis of a particular index. The indexing bond strategy can be said to have more flexibility in comparison to the passive and active strategies, despite the two sharing similar characteristics.
Bottom Line
Investors have a plethora of options in front of them when it comes to debt investing. But these options should be evaluated keeping in mind an individual target and the risk profile. For instance, passive investing is for income investors, the active strategy maximises returns and casual investors can stay away from it.
Investors can opt for any of the above-mentioned strategies, but they should conduct proper research before proceeding.
