Are you feeling overwhelmed about where to start when you decide to begin investing? How about starting with bonds? These days, bonds are quite popular because they offer higher returns than savings accounts and are less risky than stocks, attracting many beginner investors.

To explain what bonds are simply, governments or companies borrow money from investors when they need funds. They promise to pay interest over a certain period and return the principal at maturity. From the investor's perspective, it's lending money and having the right to receive interest and principal. As of last year, the 3-year government bond yields about 3.3% annually, which is higher than bank fixed deposits, and since the government guarantees the principal and interest, it’s quite a safe investment.

There are several reasons why bonds are attractive. First is stability. Especially government bonds or AAA-rated corporate bonds are considered to have almost no risk of principal loss. Second is regular interest income, typically paid every 3 to 6 months. Third is liquidity. You can sell bonds freely in the market before maturity, which is a big advantage. The average daily trading volume in the Korean bond market is about 25 trillion won, indicating active trading. Fourth is price volatility due to interest rate changes, which can be exploited for capital gains if managed well. Lastly, there are tax benefits: only interest income is taxed, while capital gains from trading are tax-free, offering tax savings.

Comparing bonds with fixed deposits, their structures are completely different. Fixed deposits involve depositing money in a bank and waiting until maturity to receive the agreed interest, with up to 50 million won protected by deposit insurance. In contrast, bond repayment depends on the issuer’s creditworthiness, and bonds can be bought and sold in the market before maturity. Fixed deposits incur penalties if canceled early, but bonds can appreciate if interest rates fall.

There are various types of bonds. Government bonds are issued by the government and are the safest, but generally offer lower interest rates. Special bonds issued by public enterprises are somewhat less safe than government bonds but still quite stable with decent yields. Local bonds are issued by local governments, and corporate bonds are issued by private companies. Since interest rates vary significantly based on credit ratings, it’s essential to check creditworthiness before investing. U.S. Treasury bonds are also popular because they help diversify dollar assets and hedge currency risk, making them attractive to global investors.

Who should consider investing in bonds? Those who need steady cash flow will find the interest payment structure appealing. Retirees or those nearing retirement can pursue higher returns than savings accounts without exposing themselves to the large volatility of stocks. Even investors who find stock market fluctuations stressful can benefit from bonds as a good asset allocation tool. Bonds have a low correlation with stocks, so allocating part of your portfolio to bonds can effectively reduce overall risk.

Of course, bonds also carry risks. When interest rates rise, the prices of existing bonds fall. For example, if you buy a bond paying 3% interest and market rates increase to 4%, that bond becomes less attractive, and its price drops. If you expect rates to rise, it’s better to choose short-term bonds with 1-3 years to maturity or floating-rate bonds. If you buy corporate bonds and the issuing company goes bankrupt, you might not recover your principal, so prioritizing bonds with high credit ratings is wise. Foreign bonds can also be affected by exchange rate fluctuations; considering hedged ETFs or investing only part of your assets in dollars can help diversify and manage risk.

There are three main ways to start investing in bonds. First, buying individual bonds directly. Second, investing in bond funds. Third, trading bond ETFs on the stock exchange. Direct purchases are taxed only on interest income, with capital gains being tax-free, but funds and ETFs involve fees. However, they allow for diversification with smaller amounts and offer higher liquidity.

In simple terms, bonds are investment products that balance safety and yield. They are an excellent choice for those who want higher returns than savings accounts but want to avoid the large volatility of stocks. If you’re just starting out, consider relatively safe options like government bonds or bond ETFs, and gradually expand your portfolio to include corporate bonds or international bonds.