There is a topic that has been frequently appearing in recent finance communities. It’s questions about what bonds are and how to invest in them. Many people want higher returns than savings accounts but want to avoid the volatility of stocks.

Bonds can be seen as IOUs issued by governments, corporations, or public institutions that borrow money from investors and promise to pay interest over a certain period. From the investor’s perspective, buying a bond means lending money to the issuer and receiving regular interest payments and the principal at maturity.

To understand the concept of bonds, you need to know some key characteristics. First is stability. Government bonds with high credit ratings or AAA-rated corporate bonds are almost risk-free of principal loss, making them as safe as savings accounts. The second is regular income; most bonds pay interest every 3 to 6 months. Government bonds typically yield around 3%, while corporate bonds can yield about 4-6%, depending on credit ratings.

The third feature is liquidity. An advantage is that bonds can be freely bought and sold in the bond market before maturity. There are no early withdrawal penalties like with savings accounts. The fourth is price volatility: when market interest rates fall, bond prices rise; when rates rise, prices fall. This allows for potential capital gains through trading. Lastly, there are tax benefits: individual investors are taxed only on interest income, while capital gains from trading are tax-exempt.

Comparing bonds to fixed deposits makes the differences quite clear. Fixed deposits involve depositing money in a bank and waiting until maturity, but bond repayment depends on the issuer’s creditworthiness. Bonds can be sold freely before maturity, and you can also expect capital gains if interest rates decline. With fixed deposits, early withdrawal usually reduces interest earned.

There are various types of bonds. Government bonds are issued by the government and are the safest, but generally offer lower yields. Special bonds issued by public enterprises tend to have slightly higher interest rates than government bonds. Corporate bonds are issued by companies, with yields varying greatly depending on credit ratings. Overseas bonds, such as U.S. Treasuries, are also popular recently because they diversify dollar assets and are considered global safe assets.

Not all bonds are suitable for everyone. They are ideal for those who need steady cash flow, are approaching retirement, or find stock volatility burdensome. Allocating part of a portfolio to bonds can effectively reduce overall risk.

However, there are precautions. When interest rates rise, existing bond prices fall. If rate hikes are expected, it’s better to choose short-term or floating-rate bonds. Also, if a corporate issuer goes bankrupt, you might not recover your principal, so checking credit ratings carefully is essential. For overseas bonds, remember that exchange rate fluctuations can affect returns.

There are three ways to invest in bonds. The first is buying individual bonds directly through securities firms or banks. In this case, only interest income tax applies, and capital gains are tax-exempt. The second is bond funds, where asset managers diversify investments across many bonds. This allows for diversification even with small amounts, but fees are involved. The third is bond ETFs, which can be traded on stock exchanges in real-time like stocks. They offer low fees and high liquidity.

If you’re new to bond investing, it’s advisable to start with relatively safe products like government bonds or bond ETFs, then gradually expand to corporate bonds or overseas bonds. With recent expectations of interest rate cuts and the fact that bonds combine stability and yield, choosing bonds that match your investment goals and financial plan can be a smart way to begin asset allocation.