Bonds: reliable source of capital and income

Nowadays, bonds are a widely discussed term in the investment fraternity. It is considered a good source of capital for issuers and a widely accepted tool for fixed-income groups around the globe. Bangladesh is not out of this league.

Numerous government, corporate and Islamic bonds are available for investments and some are publicly traded as well.

Bonds can be a reliable source of capital and income generation. Bonds are debt instruments that offer fixed interest payments over a period and are issued by businesses, communities, and governments to raise money. To make informed investment decisions in the bond market, it is essential to follow certain guidelines.

We should start by defining our investment objectives. Are we looking for regular income, capital preservation, or diversification? Clarifying our goals will help us determine the appropriate bond types and maturities that align with our investment needs.

You should familiarise yourself with various types of bonds available, including government bonds, municipal bonds, corporate bonds, sukuk, and high-yield bonds. Each type carries risk and return characteristics, so understanding their features is crucial.

We should evaluate our risk tolerance level. Fixed-income securities or bonds generally offer more stability than equity investments, but some bonds may carry higher risks than others. High-yield bonds, for example, offer higher yields but are associated with incremental default risk. We should choose a bond that matches our loss absorption level or risk appetite.

Credit rating agencies assign ratings to bonds based on their assessment of the issuer's ability to repay debts. Higher-rated bonds are generally safer but offer lower yields, while lower-rated bonds may carry higher yields but involve increased credit risk. Types of credit ratings and their implication are available online.

We should monitor interest rates and assess their impact on bond prices. Bond prices move inversely to interest rates -- when interest rates rise, bond prices fall and vice versa. Consider the current interest rate environment and have some idea of where interest rates can move when making investment decisions.

Diversification is essential to mitigate risk. We should allocate our bond investments across various issuers, sectors, and maturities. This helps reduce the impact of any single bond's default or interest rate changes on our overall portfolio.

Duration is a measure of a bond's sensitivity to interest rate changes. Longer-duration bonds are more sensitive to interest rate fluctuations, while shorter-duration bonds are relatively less affected. Choose bonds with durations that align with our investment horizon.

We should understand the tax implications of bond investments. Zero-coupon bonds are usually tax-exempted for a specific group of investors in higher tax brackets. However, interest from corporate and government bonds is generally taxable.

Investors should follow economic news, market trends, and issuer-specific developments, and monitor financial indicators, such as GDP growth, inflation rates, and central bank policies. These factors can affect bond prices and market conditions.

If we are uncertain about bond investments or lack the time to conduct thorough research, consider consulting a financial adviser. A professional can provide personalised guidance based on our financial situation, goals, and risk tolerance.

Now the question comes to how someone can invest in bonds in Bangladesh. Investing in bonds is easy. Anyone can invest in bonds through exchanges with their beneficiary accounts account or can take privately placed bonds from issuers that are available to the public.  

Bond investment requires careful analysis and proper due diligence. By following these guidelines, we can make informed investment decisions and build a well-diversified bond portfolio.

The author is chief executive officer of Community Bank Investment Ltd.