An introduction to Bonds
Fixed Income in India is this super-interesting market, because people love to know exactly what they will get in terms of returns. How much, you ask, will I make? I
In equity, the answer is
An introduction to Bonds
Fixed Income in India is this super-interesting market, because people love to know exactly what they will get in terms of returns. How much, you ask, will I make? I
In equity, the answer is: No one knows. In gold, the same. In real estate, you won’t even know the value of your money on a regular basis, just when a neighbour sells his property.
But there’s a market where you do know.* Fixed-income, and this has usually been Fixed deposits, or EPF, or things like that. But there’s a bigger beast out there – the bond market. When you can buy some of these “bonds” and make the interest, similar to what mutual funds do.
* Conditions apply, as usual.
So we start a bond series. We’ll explain the bond market and its nuances.
The idea is to understand the different bonds available in market and risks associated with each of them. For investors who don’t want to get into the intricacies of managing an individual bond portfolio can opt for debt funds, which are managed by professionals.
To understand the basics of bonds like what are bonds? Terminologies associated with them, How to buy etc, please read “How To Buy Bonds Online – The Basics, Part 1”
Why Invest In Bonds?
We all know what’s happening at the banks – they offer lousy returns in fixed deposits and they are taxed heavily.
Mutual funds, in turn, are not entirely in your control – they can go buy some really shady debt if they want.
If you are an active investor and inclined at getting slightly better returns than banks and willing to take a slightly higher risk, then bonds are worth considering as part of your portfolio.
A bond could give higher returns for the same kind of risk as a fixed deposit, and more importantly, allow you to sell before the maturity date is here.
Beware though: not all bonds are same. Bonds might give a definitive edge in returns over bank deposits but it comes with a rider of checking on issuing company’s credit worthiness. In most cases rating agencies give a credit rating but that can deteriorate quickly, and without warning. Credit risk is simply the fear of not getting your money back. It’s a risk in the bond market, though many corporate deposits too have seen sharp declines.
Most diversified portfolios have some amount of exposure to bonds as bonds are considered conservative compared to equity. In other words, bonds help you to keep you portfolio anchored with steady returns.
While the objectives of investing in different varieties of bonds vary from individual to individual, but the underlying assets in most cases tends to be same (cashflows from issuing firms, corporate guarantees or some collateral). There are a variety of bonds available in the market and each of them have different scheme of arrangements and come with a different set of risk profiles. The better the rating, the lower the coupon rate. The highest rated bond is said to be AAA rated, and the worst is a “D” (defaulted).
Why Bonds Are No