When it comes to investing, bonds can provide a reliable income source, capital appreciation, and relatively low volatility. But like all types of investments there are risks.
Think of bonds as loans that investors give to companies or governments. In return, these entities pay regular interest payments to the investors. Bonds can play several key roles in an investment portfolio, providing diversification, stability, and income. Regarding diversification, bonds provide a shield during periods of volatility and therefore help to reduce risk.
The risk? General market conditions, economic events, or global crises can impact bond prices. Bond values may be influenced by broader market movements which can affect returns. In addition, as inflation erodes the purchasing power of money over time. Fixed-interest payments may not keep pace with inflation. If inflation rises more than predicted, the return on bonds may be lower than anticipated.