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The name is Bond, Corporate Bond…or Savings Bond, or Gilt-Edged Bond, or Junk Bond – OK, this is getting silly now.
When we think about the best way to get an income from our hard-earned cash, many of us will think about bonds. This makes sense – a bond is simply a product that you invest in and for an agreed period you will receive interest on that money, until the agreed term is reached and then you should get your money back. But it is not the only way to get income from your cash.
How likely you are to get your money back really depends on the type of bond you are investing in. For example, gilts – or gilt-edged securities – are those usually issued by governments, and they are considered the safest form of investment because the government would have to go bust before you lose your money.
In recent times though, the safety of even these has come into question, especially when a country the size of the US was close to defaulting on its bond payments within the last few weeks.
You have to accept some level of risk with every investment, and that includes bonds, but if you are looking at corporate bonds with big companies, these are likely to be safer than those with smaller balance sheets.
Remember though, you do not have to rely on one bond, you can invest in a bond fund which will spread your risk, and will allow you to withdraw your funds earlier if you need to.
To be honest, you don’t have to rely on bonds at all for income. There are plenty of equity income funds that will aim to pay you a set amount each year. But since they are reliant on the payments of dividends from company shares, which are less reliable than bond interest, you would be potentially taking a higher risk here. In some cases, your initial capital can be eaten away when dividend returns weaken.
Property has always been a popular way of generating income, as the bricks and mortar have a physical value, which will go up and down according to the markets, but it will always be there. It is an insurable risk too, against anything that might destroy the assets, such as a fire or flood.
Investing in property, which is then rented out, is a good way of generating an income that in some jurisdictions you can get tax breaks against, and you can also borrow to invest in the property – a strategy which is not simple to do with shares or bonds. But, remember that you may not be able to liquidate this money quickly, so it really is an investment for the longer term.
First published in Asia Life