Is investing in government bonds a good idea? First and foremost, it is important to note that government bonds are also referred to as treasury bonds. The two are used interchangeably even though their main difference is the term maturity.
Government bonds simply refer to securities sold by the government to the public. They help provide a steady and predictable income. This is because they are fixed-income security. Interests are paid every year depending on the duration of the bond.
Most bonds are not publicly traded. When it comes to government bonds, investors buy them directly from the government. As an investor, you do not need to use middlemen to buy government bonds.
This is how to invest in government bonds and make money. First, an investor might decide to hold those bonds until they fully mature and later on collect interest earned from them. Depending on the terms, government bond interests are usually paid twice a year.
The second way how to make money through purchasing bonds is by selling them at a price that is slightly higher than what you initially invested in.
Benefits of government bonds
- They are a secure investment
Government bonds are usually considered low-risk investments. When investing, what most people consider is the possibility of the organization they are investing in defaulting in payment or running bankrupt. But this being the central government, it is almost impossible to expect it to default on the payments.
According to Forbes, one of the most secure investments that have low risks is government bonds. This is because they offer low-interest rates and have the full backing of the central government.
- They offer tax benefits
In most states, government bonds are usually exempted from tax.
- It is easy to predict income
People tend to invest in government bonds because in most cases, the investors can calculate how much they have to pay over a given duration of time. On the same note, the investors can predict their returns over a set period. In most cases. The government pays a fixed amount of interest twice a year.
- It improves liquidity
People have the option of buying and selling government bonds just the same way as buying and selling equity instruments. This means that government bonds are very liquid since bondholders have the ability and freedom to resell them.
- It helps diversify portfolios
Investors tend to have a well-diversified portfolio when they invest in government bonds. These bonds are usually risk-free and as a result, it mitigates the risk of the portfolio.
Disadvantages of government bonds
- They have a low rate of return.
Since the risk of the government defaulting on its obligation is very low, the rate of return is also low. The low yields arise from the simple fact that the government is less likely to default unlike earning from corporate bonds. Investing in corporations involves a lot of risks because some debts might less likely be paid even though such bonds have high returns.
- Interest rate risk
Government bonds are long-term investments. It takes 5 years or more for the investment to get to maturity. This is risky since they might lose value during this period as a result of inflation. The interest rate becomes less attractive with an increase in inflation.
Are government bonds a good investment?
According to the brief analysis we have given, it is fair to say that the answer to this question will entirely depend on individuals.
For instance, some people tend to be more risk-takers than others. In this case, government bonds will be a good investment for low-risk takers. On the other hand, high-risk-takers might decide to invest in corporate bonds that have high returns.
People who are approaching retirement or those who have already retired will prefer investing in government bonds. This is because government bonds are considered a safer place for money unlike investing in stocks.