DEBT MARKET – BOND MARKET IN INDIA
Only a few investors might aware of the bond market. Here we will be learning about the debt market through some Phases and also about the advantages of the debt market.
The underestimated or underrated market holds an average return of 7.5-10% per annum, which is ultimately more than all endowment, cashback life insurance policy, fixed deposit, recurring deposits, and all post office schemes.
Before we dive deeply into the methods and investment option, we have to understand the basics and how it works.
We will be touching upon the following topics.
· What is a Bond or Debt Market?
· Types of Bond Market.
· Advantages of Bonds.
· How to apply a bond.
BOND MARKET – DEFINITION:
· Bond in simple terms means the Government or Corporate companies supply their part of assets as an agreement to investors as a security, for debts for a particular tenure. Bond is always a fixed income investment instruments for the investors as the agreement speaks the interest rate and tenure.
· The Bond can be issued by both Government, RBI, Corporate companies. The highest valuable bond is G-Sec bonds (Government Security Bond).
· There are many types of bonds like RBI Bond, Bank bonds, Debenture Bonds, Convertible bonds, treasury bills, central and state government bonds, etc.
· The place where we can buy or sell these bonds is known as the Bond or Debt market.
Why Government or Corporate approach the Bond Market?
The Government and Corporate companies approach the bond market to raise funds for their development and progress. The other option is to get loans from banks for which they have to pay high interest as compared to bonds or debt instruments.
RBI recently issued a bond for a 7.75% interest rate for 7 years, as you see here RBI will be paying an interest rate of 7.75% to the investors for 7 years, which is a lower rate compared to loans.
In a simple way, corporate companies get a huge loan as their cash flows to development or investment in new portfolios and return the capital with minimal interest in the particular tenure.
TYPES OF BOND MARKET:
Basically, there are two types of markets. They are primary and secondary markets.
The place at which borrower provides their security instruments and borrows the desired amount from investors. There will be s fixed rate in coupon and issue price of bond in India.
The secondary market is basically referred to as, the trade happening in the stock market. When it comes to trade, it always requires a buyer and a seller. The rate of the bond and Coupon (Interest) rates are inversely proportional. If the interest rate decreases, the value of the bond increases, and if the interest rate increases, the bond value decreases.
For example, if you buy a bond for Rs. 1000 at a coupon rate of 8%, the earning per year is Rs. 80. If the interest rate or coupon rate reduces to 6.5% or 6.4%, someone has to pay Rs. 1250 to buy the bond, only then you will receive the earning of Rs. 80 per year. This is how to bond value and interest rate or inversely proportional.
Note: If you don’t trade it in the secondary market or hold the bond till the tenure as per the agreement, you will get the capital as well as the interest earnings as per the bond without any change.
FEATURES OF INVESTING IN BOND MARKET:
· As discussed earlier, the bond is a type of fixed income with a security instrument.
· There is a dividend option available in yearly, half-yearly, and quarterly.
· People who retire or invest Lumpsum amount and need a fixed income regularly can invest in bonds.
· It cannot be used to liquidate at the time of any emergency. In fact, you can sell the bond in the secondary market, but the yield depends on the interest rate.
· There is no credit and liquidity risk. The only risk associated with it is Interest rate risk.
· But, investing in bonds is not easy. The minimum amount will be in some lakhs, which is not a cake for everyone. It is one of the limitations in, investments in bonds.
· In India, the bond market doesn’t have many players, and the market is led by the government, RBI, and PSU Banks, this ensures the safety of the investor’s capital.
APPLYING A BOND:
· It can be done both online and offline through brokers of your Demat account. The bonds have to be subscribed through the primary market.
· Like equity, the bond also has the face value and you can invest in the multiples of the face value only.
· Bonds in India can be traded through stock exchanges like NSE and BSE.
· If we don’t have enough funds to buy the minimum slots of Bond face values, we have another option, Debt mutual funds.
· We can invest in these debt mutual funds where the liquidity is very quick and professionally managed by a fund manager.
· Never buy a bond that gives you more interest rate, check a bond that has a CRISIL rating of AAA, which has more safety than other bonds.
Note: In the next topic, we will be covering completely debt mutual funds
· Bond or debt market is one of the safe ways for investors with equal returns to the inflation rate.
· You have to buy the bonds in the primary market and hold it till the maturity period or fixed tenure.
· If required in case of any emergency, you can sell in the secondary market, but there is a risk of interest rate while selling it in the secondary market.
· There is no credit and liquidity risk associated with bonds.
· In the last three years, bond markets are yielding an average of 7-10% returns per annum, which is a good return when compared to all traditional ways of returns.
· Before purchasing a bond, go through its CRISIL rating if it’s a corporate bond.
· It would be good to invest in G-Sec, GOI, and RBI bonds which don’t require a CRISIL rating, rather it has high safety and security for your capital.
Disclaimer: Investments are subject to market risk, do read all the documents and fact sheets carefully. Don’t invest, only by the promotions by articles or youtube.