Many people begin investing with stocks.  Although most investors understand the need for diversification, bonds can be confusing.  In case you’re interested in bonds, but don’t know where to start, here are the basics of bonds and bond funds.

Bonds may help provide income and stability.

To understand the basics of bonds, it may help to think of them as securities similar to loans.  Governments and corporations issue bonds to raise money.  The money generally finances new projects, refinance debts, or maintain operations.  Regardless, the issuer typically makes interest payments at regular intervals, and repays the full investment at the end of a set period of time (maturity).  Bonds can be very beneficial in your diversified portfolio:

Income

Interest payments from bonds can help you build an income stream.  Then using the income stream to supplement your existing income creates a source of retirement income, or you can reinvest.

Preserve Your Capital

If you’re concerned about protecting your capital investment, bonds may be a good choice.  In most situations, your original investment is repaid, depending on the financial health of the issuer.  However, if you’re interested in more immediate financial needs, other short-term options may be more appropriate.  Likewise, if longer-term needs are your goal, investments with more growth potential may be more appropriate.

Volatility

Investment-grade bonds usually have the financial strength to make interest payments and repay your original investments.  They’re also less volatile than stocks.  Bonds may also perform well when stocks struggle which provides an excellent potential for diversification.  If you want to lower the volatility of your portfolio, bonds may meet your needs.