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The Superpower of Investing in bonds for income
You must have heard countless times about the importance of investing in equities and how it can help you achieve financial freedom. But today, we will take a different tone and talk about the less talked about instrument and how it can help you meet your regular expenses and higher cash flow.
Today, we will understand the significance of investing in bonds for income and financial stability.
What is a bond?
Bonds are a financial instrument that firms, governments, and other organizations use to raise funds. These are loans, but instead of getting money from a bank, these companies get it from investors, pledging to pay back the principal plus interest regularly. The principal amount, interest rate (coupon rate), maturity date, and frequency of interest payments are all specified in this bond, together with other necessary loan terms and conditions.
Investing in bonds for income
When you become a bondholder, you will be paid the interest payment according to the decided schedule, and you can utilize this income to meet your near-term expenses, or if you do not find the need to consume it, you can use it to invest in other assets and buy some lucrative options.
These bond payments help you increase your cash flow, give you more command of your money, and enable you to newly surfaced opportunities.
One thing to observe, especially in India, is not many people have multiple income sources. They train themselves to hone skills in one field only, and when that source of income stops, it creates a panic situation for the user.
Bonds can act as a stable secondary source of income, offering a consistent revenue stream to supplement your primary financial resources.
These income-producing assets have several benefits for those looking for dependable supplemental income. Bond interest payments are frequently steady and predictable, making them ideal for putting money aside or using to cover recurring costs. Bonds are a vital component of a diversified investing strategy because they distribute risk and prevent your secondary income from being unduly dependent on the success of a single asset type.
Moreover, you can tailor your income strategy with bonds, selecting options that match your income needs and risk tolerance. Some also offer tax advantages, enhancing your after-tax return.
Remember the COVID situation?
When people were laid off in numbers, having nowhere to go and no source of income present. At that time, the interest payments from the bonds would be of great help to many of the people.
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Why cashflow matters?
Investing all your money in equities causes a different kind of problem when you face any new kind of opportunity and after doing the research, you find it valuable, but having all your money invested already leaves you with little to no money for this venture.
Had you invested some in bonds, you would receive payments that you can thus use to grab this offer. If you invest in bonds every month be disciplined, and invest consistently, you will create a financial system of receiving monthly payments from the source.
What kind of bond should you invest in?
There are different bonds in the market, and we have too many options in front of us.
But here, we will focus on mainly one bond, and that is the government bonds. The government bonds are offered by the Government of India and carry the minimum risk of default. Unless the government goes bankrupt, and let’s be honest, it is hard to imagine that this will ever happen.
Advantages of Investing in Government Bonds:
- Guaranteed Income: You will receive payments as long as you possess bonds. The longer the duration, the more events of getting paid.
- Little to no time: The government of India bonds are among the safest bonds you can buy in India. If the interest rates satisfy your appetite, it is okay to invest without any more thinking.
- Little to no effort: Government bonds are among the safest bonds. You need not do much research to decide whether your money is safe.
- Stay Invested for the long term: Government bonds can go as long as 30 years. Once you invest, you need not worry about it.
- Ease of availability: Bonds are available to anyone having a demat account. It’s not a big deal to open any demat account.
- Taxation: If you sell after a year, you pay a 10% tax on the profit. And if you sell for less than a year, the tax is according to your slab rate.
And if you ever need quick access to your money, government bonds are liquid. You can easily buy or sell them in the secondary market, giving you the flexibility to use your funds when necessary. It’s like having cash readily available when you need it.
How can you invest in Government Securities?
For this particular section, I would recommend you use Kite’s Coin platform to buy bonds. It is one of the most seamless platforms with low cost for buying bonds. They only charge Rs 6 for every Rs 10000 invested.
Here is the link for creating an account on the platform.
How much to invest in bonds?
Here are some available bonds at the platform as of writing this article.
Let’s pick the one with an interest rate of 7.54% and base our maths around it.
For every 10,000 invested, you will receive Rs 754. Do your calculations and find out how much to invest each month on these bonds.
The more you invest, the higher the cash flow you build up for yourself.
Evaluate your monthly income and divide the investment money into bonds and equities according to the financial objectives. The general theory is that the earlier you invest the more you can invest in equities, and as you age you can increase the allocation to bonds to maintain the risk.
Your allocation of funds can be best decided by you but if you are someone who needs a framework or idea on how to allocate funds you can check out the following articles:
Final words:
In conclusion, bonds are a flexible choice for investors looking for consistent income and financial flexibility because they provide a variety of ways to increase cash flow. Bonds can be a crucial element in enhancing your cash flow and supporting your financial goals, whether you want to assure stability, diversify your income portfolio, or improve the tax efficiency of your investment strategy.
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