Portfolio diversification has become intrinsic in successful investing practices. With many asset classes and securities available in the investing bazaar, investors have a lot to choose from to satisfy their financial goals, considering not everyone believes in putting all their eggs in one basket. As such, deciding upon the structure of an optimum portfolio becomes crucial.
Fixed income securities are often revered to be safe investment havens, and a buffer against market volatility. One such security, corporate bonds, offers a variety of benefits bringing diversity to investor portfolios. These securities are debt instruments that companies use to raise capital, by issuance to bond holders. These securities are considered to be the “yin” to the “yang” of stocks, when it comes to investing. As such, corporate bonds offer the following benefits to investors –
1. As previously mentioned, corporate bonds are a great way of introducing diversification to spread the portfolio risk. These securities can provide a smooth and regular income flow to the bond holders, in situations of volatile equity markets.
2. In comparison to government bonds, corporate bonds have the potential to offer higher returns, generally a yield of 4-5%. They can go up even more, depending upon the risk taking capacity of the investor.
3. Corporate bonds carry the benefits of high liquidity and can be traded in the secondary market. This gives the investors opportunities of benefiting from favourable price positions.
4. In case of any perilous situations where the bond issuing company becomes insolvent, shuts down or liquidates, corporate bond holders have a top hand in their claims as being creditors to the company, in comparison to stock holders.
5. Widespread options are available for corporate bonds, and the investors can make their choices in regards to the maturity period, yields, coupon structures, etc.
6. Some bonds are convertible in nature, hence, giving the holders the opportunity from benefiting from bond conversions to stocks.