Many seem to be interested in buying government bonds. You can buy such bonds by placing bids through your Brokerage account. The intention to invest in such bonds is not surprising, since they are credit -free. In this article we discuss the factors that you should take into account when investing in such bonds.
Mar Risk
Imagine this. You have a clump horse money, which, if invested with 6.5% per year, you can help achieve a goal of 10 years. So you buy a 10-year government bond that pays 6.50% per year.
The bond you pay interest every six months. The problem is that you have to invest the interest received by 6.50% per year for the remaining period of the goal. Otherwise it is unlikely that you collect the wealth that is needed to achieve the goal. Why?
The required return of 6.5% is a (post-tax) compound annual return, referred to as a minimum acceptable return or Mar.
This means that you have to invest the interest every year with 6.5% per year during the life of the goal to collect the required wealth.
Tires with government bonds do not worsen the income of the interest. You must find roads to reinvest the interest income. The risk is that the interest in every period could fall due to the lifetime of the bond (namely reinvestment risk).
That means that you could not reach the goal. It is also optimal to match the maturity of the bond with the time horizon for the life purpose; You cannot get the maturity suitable for the life purpose when you invest.
If you have a goal of 10 years, there must be an auction of a 10 -year bond when you invest. This makes investment difficult for 6, 7 or 8-year-old life goals, for example, because RBI may not auction bonds for such running times. Note that interest income on government bonds are taxed at your marginal tax rate.
Conclusion
What about funds that invest in government bonds (gilded funds)? Your investment is based on the net asset value of the fund (NAV), which is the market value of the portfolio divided by the number of units. This means that the NAV from the fund will decrease when bonds in the portfolio fall in price. That is why such investments are exposed to market risk.
Direct investments in government bonds have no market risk; You can hold the bonds to adulthood and get the nominal value, regardless of the interest at that time.
(The author offers training programs for individuals to manage their personal investments)
Published on September 1, 2025
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