Risks of Bonds

Investing in bonds is generally considered safer than stocks, but bonds are not risk-free. When people think of investing, they often see stocks as risky and bonds as safer. And it’s true to an extent — bonds are usually more stable than stocks because they provide regular interest payments and return your money at the end of a fixed period (called maturity). Here are the main risks of bonds: Interest rate risk means that if general interest rates in the market go up, the value of your bond can go down. Imagine you buy a bond that pays you Rs.500 a year in interest. A few months later, new bonds start offering Rs.600 a year for the same price. Naturally, people will prefer the new bond that pays more. So if you try to sell your old bond (the one paying Rs.500), no one will want it unless you lower the price. Credit Risk – Issuer may default (higher in corporate/junk bonds). When you buy a bond, you're lending money to a company or government. In return, they promise to pay you regular interest and to return your full money at the end. But credit risk means there’s a chance the issuer may not be able to pay you back — either the interest, the full amount, or both. Inflation Risk – Fixed payments lose value over time due to inflation. When you buy a bond, you get fixed interest payments (like Rs.500 per year). But if prices of goods and services keep rising (which is called inflation), then that Rs.500 won’t buy as much in the future. Liquidity Risk – Some bonds are harder to sell before maturity. When you buy a bond, you can either Hold it until maturity (and get all your interest and money back), or Sell it early if you need cash. But liquidity risk means you might not be able to sell your bond quickly or at a good price when you want to.