Think Before You Sell Your Bonds
Bonds is a stable financial vehicle for the purpose of producing income. There are economic conditions where particular types of bonds might lose value in the eyes of some people. So instead of deciphering this as if all bond funds are bad, you need to take the time out to understand those circumstances and figure out if it affects you.
There are three things you need to know about bonds to interpret all the noise you hear in the news: The difference between individual bonds and bond funds, the variety of bond types, and figuring out how this type of investment fits in with your goals.
1. Bond funds vs Individual bonds
Usually there is a lot of talk in the news about rising interest rates and the effect that they will have on bonds. The real question though is if this affects you? It may or may not depending on your bonds.When you are in possession of an individual bond, then you can hold that until maturity and therefore you will know exactly how much you pick up on that. For example:- If you’ve bought a bond for an amount of $10,000. Its maturity period is 5 years and gives a coupon rate of 3%. The following year the interest rates rise. Your bond still has 4 years remaining until maturity, the going rate on 4 year bonds is now risen to 4%. Now at this point if you try to sell the bond, you will get less than what you paid for the bond. because the coupon rate is lesser than the rate at which is going. If you hold onto your bond until maturity, then this doesn’t matter and you will get your money($10,000) back.
A bond fund though does not work in the same manner. Bond funds own hundreds and thousands of bonds. If within a short period of time a lot of mutual fund shareholders take the decision to exit from the bond fund, the manager of the bond fund is left with no option but to sell those bonds, even if its at a loss, to make sure there is enough money to return funds to shareholders.
2. All bonds are not all alike
There are many different kinds of bonds such as corporate bonds, high-yield bonds, municipal bonds, government bonds, floating-rate bond instruments, and many more. Even within a certain category such as government bonds, something such as Treasury bills have different characteristics
‘Bonds are currently not a good investment right now’ is a very broad statement to make. What can be done is that you determine your investment goals, also the type of bond fund or bond you own, and then decide if that bond is a good investment based on your current goals.
3. Your personal goals
You should know why you own bonds. Either they are there for income production, to deliver a secure cash flow in order to meet an expense, or are they there to minimize the volatility of your portfolio. If you are closing in on retirement then individual bonds can be great for you and bond funds could be a very good choice for those who have many years to go for retirement. The other thing you need to consider is where will you put the money after selling your bonds. Will you move it to stocks which is an additional risk? Or would you deposit it in a savings account which gives you nearly no interest?
These are the factors you need to consider before you go ahead and get rid of your bonds.