With economic conditions becoming increasingly uncertain, how can investors maintain a balanced portfolio? What type of investment options are ideal in these conditions? And what steps should be taken to maximize the return on that investment?

In this economic environment, there are several things that investors must consider. With the volatile financial landscape, investors are increasingly burdened with the difficulty of generating attractive returns while also hedging against risk. One type of investment instrument that can be a solution for this need are bonds.

What is a Bond?

A bond is debt security which is essentially the bond issuer’s promise to pay compensation in the form of interest to the bond buyer as well as pay off the principal at the end of the specified period. The interest or coupon payments are made in regular intervals (for example, per month or every six months).

When governments or companies require funding for expansion or other projects, they can issue bonds as a way of obtaining capital. Investors who buy bonds basically buy a promise from the issuer to pay the principal back at the end of the agreement period and to provide interest through regular coupon payments. In this agreement, the bond issuer benefits from obtaining the needed funding while buyers or investors benefit by receiving interest or coupons in return for loaning the bond issuer their funds.

Types of Bonds

There are two types of bond issuers: governments and corporations. In Indonesia, government bonds are issued by the Republic of Indonesia. There are bonds with fixed coupons such as Indonesian Retail Bonds (ORI) and the Fixed Rate series (FR), floating coupon bonds such as the Saving Retail Bonds (SBR), and sharia bonds such as the Retail Sukuk (SR) and Savings Sukuk (ST). Corporate Bonds, on the other hand, are governed by similar principles as government bonds but are issued by corporations, both public and private.

Why Invest In Bonds?

So what exactly are the advantages of investing in bonds?

Regular coupon payments and the return of principal at maturity can provide investors with a more stable investment option when dealing with market volatility. It is also suitable for investors who are looking for investments that can provide a regular and stable cash flow.

With the BI 7-day Reverse Repo Rate currently at 3.5%, if investors place their funds in time deposits or similar short-term investments, the yields that will be obtained appear to be quite unattractive. On the other hand, the current 10-year Indonesian government bonds provide yields/YTM (yield to maturity) above 7%.

Investment Risks

Of course, all investments have risks. There are several bond risks including the risk of price changes, the risk of default, and the risk of liquidity.

All things considered, bonds can prove to be an attractive financial instrument in the current economic conditions. So, will you start to generate a passive income from bonds?