Investing in bonds - the basics

Publication date: May 27, 2025

Investing in Bonds: Stability, Income, and Smart Strategies for Beginners

Are you looking for a way to grow your wealth without being involved in the daily ups and downs of the market? Then investing in bonds might be an interesting option. Bonds are known for their stable returns and predictable structure, which is why they have been popular for years among both beginner and experienced investors. In this article, you'll discover what bonds are, what advantages and risks they involve, and how to invest wisely and diversely even if you can only spare a small amount each month.

What are bonds?

Bonds are debt instruments issued by companies or governments. Purchasing a bond means you are effectively providing a loan to the issuer. In exchange, you receive regular interest payments on the amount loaned, typically on an annual basis. Upon reaching the bond's maturity date, you are repaid the entire principal amount you originally invested.

Bonds generally provide a fixed return and a predetermined maturity date, offering greater predictability compared to stocks. This characteristic makes them especially appealing to investors who prioritize stability, capital preservation, and a less risky investment strategy.

The benefits of bonds

Obligations have several advantages over other investment options. First, bonds offer a relatively stable source of income in the form of interest payments. This can be especially attractive to investors looking for regular cash flow.

In addition, bonds typically have a lower risk compared to equities. Most bonds have a fixed return and a set end date, giving you more certainty about your investment. This makes bonds a good choice for investors who want to take a less risky approach to investing.

You can divide bonds into a few main types:

- Government bonds: These are issued by national or local governments to cover budget deficits or refinance existing debt. Well-known examples include Dutch government bonds and U.S. Treasury Bonds. They're generally seen as relatively safe, especially when issued by financially stable countries. The chance of a government failing to meet its payments is low, which makes these bonds popular among cautious investors.

- Corporate bonds: Companies issue these to raise money, often to fund growth or new projects. Since businesses are more likely to default than governments, corporate bonds usually offer higher interest rates as compensation for that risk. The higher the risk, like with smaller or less creditworthy borrowers, the higher the potential return, but also the greater the chance of losing money.

- Supranational bonds: These are issued by international organizations such as the World Bank, the International Monetary Fund (IMF), or the European Investment Bank. They raise funds for large-scale projects like infrastructure, renewable energy, or poverty reduction. Supranational bonds tend to have high credit ratings and sit somewhere between government and corporate bonds in terms of both risk and return.

How Do Bonds Work?

The concept behind bonds is simple:

You buy a bond, for example, for €1,000, and receive a fixed interest payment either once or twice a year.
During the bond’s term, you earn this interest as a steady source of income.
At the end of the term, you get your original investment back when the issuer has stayed financially healthy.

For instance, a bond with a 5-year term, a face value of €1,000, and an interest rate of 4% would give you €40 in interest each year. At the end of those five years, you’d get your €1,000 back.

Investing in Bonds Yourself

If you like to stay in control of your investments, buying bonds yourself can be a good option. Through various easy-to-use platforms, you can select bonds that match your goals and risk profile. You can compare interest rates, look at terms, and choose bonds from governments, companies, or international organizations.

Prefer convenience or want instant diversification? Then, bond ETFs or mutual funds might be worth considering. These funds invest in a broad range of bonds and handle the selection and management for you. That makes them ideal for beginners or anyone who doesn’t want to spend too much time actively managing their investments.

Whether you go for individual bonds or a diversified fund, both options give you access to stable income and a relatively low risk profile. The key is choosing what fits your knowledge, goals, and available time.

Periodic investing in bonds

If you prefer to invest steadily over time, periodic investing might be a good fit. With this approach, you invest a fixed amount each month in bonds of your choice. It comes with several advantages.

One key benefit is the so-called dollar-cost averaging effect. This means you automatically buy more bonds when prices are low and fewer when prices are high. Over time, this helps spread your risk and can lead to better returns

Experience it yourself

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Risks

Even though you spread your investments, risks are still part of the picture. One of the main risks bond investors face is the possibility of rising interest rates. When overall rates in the economy go up, the value of existing bonds can drop. That’s because new bonds offer higher returns, making older ones with lower rates less attractive on the secondary market.

If you need to sell your bonds before they mature, you might face price drops and a potential loss of capital. That’s why it’s important to pay close attention not only to interest rate trends, but also to the bond’s term and type, so you can better manage the risk of rate fluctuations.

Conclusion

Investing in bonds is a solid choice for anyone looking for stability, steady income, and diversification. Especially in uncertain economic times, bonds can offer a sense of calm within your portfolio. By paying close attention to the bond’s term, type, and interest rate trends, you can make informed and thoughtful investment decisions.

Disclaimer: Investing involves risk. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.