Premium bonds - secure way to save money

Issued by the UK government's National Savings and Investments scheme, premium bond is an easy and secure method to save money along with a chance of winning tax-free prizes. It ensures investors that their capital stays 100% safe. Generally, there are two types of premium bonds - non callable bonds and callable bonds.
A premium bondholder invests money in the government. Instead of paying interest to bond holders, the government pays money into a prize fund and provides the bondholder a chance to win tax-free prizes. Premium bonds cannot be maintained in joint names and are not transferable to another individual. Among the great advantages is that all or a part of premium bonds can be cashed any time you want.

A person can buy the national savings bond either over the phone or by acquiring an application directly from the local post office. Even so, a individual who wishes to buy Premium bonds can even download the application form from the Internet. The Premium bonds are typically sold in multiples of £ten. A person investing in this kind of bond has to make a minimum investment of £100. However, the investment in case of these bonds can go as high as £thirty,000. Anyone who is 16 years or more are eligible for making investment in these bonds. Nevertheless, in case of children and people below 16 years, Premium bonds are normally bought by their guardians or parents.

Bonds are subject to credit risk. That means that the bond is only valid as long as the company that issued it can pay the interest and the par value back. Just like a loan from a bank there is always the risk that it won't be paid back.

Secondly, bonds are subject to inflation risk. Inflation is the annual increase in the costs of goods coupled with the decreasing value of the dollar. Iother}} words our $1 won't buy next year what it will buy this year. The average inflation rate over the last 50 years is 3-4%. So, if we are earning6% on a bond and inflation is 3%, then after  few years we start to lose value on the money because our primary investment does not grow. While bonds are great for income during retirement over time we lose the buying power essential to keep up a cost of living. Bonds should be a part of your portfolio whether they are in your mutual funds or you own them directly. The crucial thing is to understand the their role and their risks.