Even the greenest investor will recognize the word “risk” and how important it is to consider when weighing up potential investments. Risk is what keeps things exciting and it has a huge influence on the perceived value of things. With too much risk, you increase your chances of failing… or worse. On the other side of the coin, if there is no risk, usually there is no reward. As an investor, you will want to maintain a balance of risk and security.
To find an investment that offers little to no risk and a high reward is considered the holy grail. Risk-free investments like a term deposit are great for slowly building wealth, but take some time to compare interest rates and you will see the reward is modest at best. Finding an investment with high return interest rates usually involves a high element of risk, but what if there was a risk-free investment that offered generous returns? Surely everyone would know about it.
When I discovered this form of investment, I was shocked that no one was talking about it, even fewer had even heard about it. As an investor I feel it’s important to share as much knowledge as possible with fellow investors so, I present to you now; Government Bonds.
A government bond is a bond issued by a national government usually promising to repay interest rates on a borrowed sum over an agreed term. At the end of this term, they will pay back the principal sum. Sometimes called a sovereign bond, these bonds are issued by governments to encourage government spending.
What does all this mean? Essentially you are lending a government money with the promise to pay it back (with interest). Depending on the individual bonds, these can offer a very reasonable rate of return and are issued in varying terms of maturity, from 6 months to 4 years and beyond.
Investing in your neighbour’s back yard auto repairs? Probably not a safe investment. Lending money to a national government? This could be considered the safest bet around. Because you are investing in a government, the chances they will default on repayment are almost non-existent. Nothing short of doomsday will stop you from making money on your investment, this ladies and gentlemen is what we call a risk-free investment.
Of course, nothing is truly risk-free, depositing lump sums of money can cause issues with your personal finances so make sure you can commit before investing. With that out of the way, what about a reward? This will depend of course on how many bonds you purchased and the interest rate of the bond. All bonds are different so read the fine print especially if purchasing bonds from a different country.
The payout from a bond is called a coupon rate, this will give you an idea of the return you can expect. Most bonds payout quarterly. If you were to purchase $100000 of bonds paying out at 5% annually, every 3 months you can expect to receive $1250. Bonds can be a brilliant way to make passive income, just make sure you keep up with your tax declaration.
So there you have it, perhaps the best-kept secret in the investing world. As risk-free as an investment can be, while offering good returns, government bonds deserve your attention. The best part about government bonds is they can usually be traded on the corresponding government website, you don’t need a broker or any financial experience. Small risk, high reward and a chance to generate passive income? You’re welcome.