There are two main ways to profit from investing in bonds: fixed income (interest income + repayment of principal at maturity) and capital gains (price difference).
Before investing, itโs important to clearly understand your objectives. For most people, investing in bonds should not be about earning capital gains (price difference). If you aim to profit from price differences, you might want to consider stocks or other commodities, or use interest rate futures, rather than buying bonds.
Fixed Income (Regular Interest Payments): Bonds, similar to fixed deposits, are an investment tool that generates regular interest income.
Lower Risk Volatility (Above Investment Grade): Compared to stocks, bonds have lower risk volatility.
Letโs now look at the two sources of bond profits.
Source of Bond Profits One: Fixed Income (Interest Income + Repayment of Principal at Maturity)
Bonds are known as fixed-income securities. Similar to fixed deposits, they offer the ability to collect fixed interest every period and to receive the face value (principal) back at maturity. Besides interest, the purchase price of a bond may not always equal its face value, potentially resulting in gains (or losses) beyond the interest. The difference between bonds and fixed deposits is that while fixed deposits are almost risk-free, bonds may carry the risk of not receiving interest payments or the principal.
Source of Bond Profits Two: Capital Gains
In the case of individual bonds, assuming no default, the returns are quite certain. Before maturity, the price will fluctuate based on expectations of future interest rates and market risk sentiment. Bond funds and bond ETFs, despite not having maturity dates, are also influenced by interest rates. Professional institutions, backed by expert teams, can use precise models to assess bond prices. Even with such resources, bond trading at professional institutions is a complex task, not to mention that itโs even more challenging for ordinary individuals without access to these tools to earn capital gains from bond investments.