Only a few investors might be aware of the bond market. Here, we will learn about the debt market through some Phases and its advantages.
The underestimated or underrated market has an average annual return of 7.5-10%, which is ultimately more than all endowment, cashback life insurance policies, fixed deposits, recurring deposits, and post office schemes.
Before we explore the methods and investment options in-depth, we must first understand the basics and how they work.
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:
- In simple terms, bonds mean the Government or Corporate companies supply their part of assets as an agreement to investors as a security for debts for a particular tenure. Bonds are always a fixed-income investment instrument for investors as the agreement speaks to the interest rate and tenure.
- Bonds can be issued by the Government, RBI, or Corporate companies. The most valuable bond is the G-Sec bond (Government Security Bond).
- There are many types of bonds, such as RBI, Bank, Debt Bonds, Convertible, treasury bills, and central and state government bonds.
- The place where we can buy or sell these bonds is known as the Bond or Debt market.
Why do Governments or Corporations approach the Bond Market?
Governments 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 compared to bonds or debt instruments.
RBI recently issued a bond with a 7.75% interest rate for 7 years. As you can see, RBI will be paying investors a 7.75% interest rate for 7 years, which is a lower rate compared to loans.
Corporate companies get huge loans 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:
There are two types of markets. They are primary and secondary markets.
Primary Market:
The place at which borrower provides their security instruments and borrows the desired amount from investors. There will be a fixed rate in coupon and issue price of bonds in India.
Secondary Market:
The secondary market is referred to as the trade happening in the stock market. Trade 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 earnings 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 will you earn Rs. 80 per year. This is how bond value and interest rate are 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 and the interest earnings as per the bond without any change.
Features of Investing in the Bond Market:
· As discussed earlier, the bond is a fixed income with a security instrument.
· There is a dividend option available in yearly, half-yearly, and quarterly.
· People who retire or invest a lump sum amount and need a fixed income regularly can invest in bonds.
· It cannot be used to liquidate during any emergency. 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 of 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.
Check out our article on the comparison between Debt market and Equity market.
Applying a Bond
· It can be done 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 a face value, and you can invest in 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 quickly and professionally managed by a fund manager.
· Never buy a bond that gives you a higher interest rate; check a bond with 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
Conclusion:
· The bond or debt market is one of the safe ways for investors with equal returns to the inflation rate.
· You must buy the bonds in the primary market and hold them until the maturity period or fixed tenure.
· If required in 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 have yielded 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. Please read all the documents and fact sheets carefully. Don’t invest, only in the promotions on articles or YouTube.