Question

Why are bonds a good option for the conservative investor ?

Answer 1

First we will discuss what is conservative investment.

CONSERVATIVE INVESTMENT - A conservative investment is one that carries the greatest likelihood of preserving the purchasing power of one's capital with the least amount of risk.

If we consider bonds, there is least or zero amount of risk involved here, so the returns are the least. This works for people who have a sizable amount of savings and are more keen on ‘protection of principal’ and are happy with ‘nominal returns’.

But bonds fail to preserve the purchasing power of one's capital as the inflation rate is more than the returns the bonds offer in real world. So, this does not suit all conservative investors, because returns are paltry and are much below the levels of inflation in India.