Bonds - Is investment in bonds risk-free?

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After making the decision to diversify his or her portfolio with fixed income investments, the investor is faced with choosing between investment in individual Bonds and investment in fixed income mutual funds. The decision can be quite a difficult one.

If you choose to buy an individual bond, you need to look at its credit quality. Bonds with high ratings such as AAA are the best ones unless you are buying a Government of India security. The drawback is that you are betting on one company or one security, however good its current condition is.

If you choose bond funds, you need to understand a few things. The first thing to consider is that Bond Funds, which may hold bonds exclusively, are not in reality fixed income securities. They do not provide guaranteed income, and they do not promise repayment of principal.

Fund managers can trade in and out of securities solely at the discretion of that manager. The risk-return profile may, in fact, change every day. Bond Funds generally have quarterly payments to holders, but the frequency will vary.

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