Here we will tell you the most awaited topic which is What are bonds and how to invest in them. We all heard about the bonds. Some of us also know the fact that the bonds can give you a return that is more than FD.
But 99 percent of us don’t invest in bonds. The main reason is a lack of knowledge about the bonds. As well as some of us think that this is very risky or it is very complicated to invest here. In this article, we will clear all of your doubts about the bonds.
After reading this article you can get a very clear idea about bonds. Here we will cover all the important questions about the bonds which you should know before investing. The topics we will discuss here are-
|1. Basics of Bonds.||2.How much return to expect?.|
|3.Types of Bonds.||4.Is the bond market risky.?|
|5.How to invest.?||6.should we invest in bonds.?|
Now let’s discuss all the points one by one.
1. Basics of Bonds ( What are the bonds and how to invest in them ).–
Now the first question is what are the bonds.? Let’s say a company needs money to grow its business. In this case, the company will do what. ? Either it can issue share or it can take a loan from the bank.
Now if the company takes a loan from the bank then the company needs to pay almost 12-15 percent interest to the bank, which is very high. So the company doesn’t want to take a loan from the bank.
As well as they don’t want to issue shares because the company does not want to decrease its shareholding. Now, what can they do.? Here the company takes money from the public directly.
Like, if you buy a share of a company then you got a share of that company and the company got the money they need.
So here, the company decided that not to issue shares and they don’t want to take a loan from the bank also because the interest rate is very high. The company gives an offer to the public. They ask the public not to invest in FD but in their bonds.
In simple language, a bond is simply a loan taken by a company from the public. In FD you will get a maximum of 5-6 percent interest. But the company says that if you invest in their bonds then they will give you 7 to 10 percent interest.
So you can say that this is a win-win situation. Because you also getting 7-10 percent interest instead of 6 percent in FD. As well as the company also doesn’t need to pay 12-15 percent interest to the bank.
The Government also can issue bonds. When the government needs money then they can also issue bonds.
2.How much return to expect (What are the bonds and how to invest in them).?—
The first important thing in the bond is face value. Face value equals to bond’s price when it was first issued. Like If any IPO came into the market, at that time if you are buying that IPO then you are buying that from the company directly.
But after that, if you want to buy that share then you buy that share from a seller. Not from the company directly. That is why it is called the secondary market.
Like that, if a company giving its bond to the public for the first time then we will call that a primary issue. And that issue depends on the face value. It is also a secondary market from where you can buy a bond.
Now the main thing comes. Which is coupon rate (Rate of interest paid by the bond issuers on the bond’s face value.). The coupon rate is always a certain percentage of the face value of that bond.
Like if the face value is 1000 rupees and the coupon rate is 10 percent then you will get 100 rupees as interest yearly. But is some important things you need to remember.
Some important things ( What are the bonds and how to invest in them )–
If you buy a bond directly from the company at the time when they issue it then you will get the coupon rate fixed by the company. But if you buy that from the secondary market ( that means not from the company directly.
You are buying from a seller who wants to sell that bond) then the face value may fluctuate. And if the face value fluctuates then the return may also change.
An example ( What are the bonds and how to invest in them )–
Let’s assume TATA issued a bond today and the coupon rate is 10 percent and the tenure is 3 years. In the next year, TATA issued a bond again but now the coupon rate is 8 percent.
Now you must think that if you invest in the previous year then you will get 10 percent interest, but you missed that chance.
But you can’t get that bond now from the company. So you want to buy that bond ( with a 10 percent coupon rate) from the secondary market.
Now the demand for that bond is increasing. That is why the 1000 rupees bond is now available at rupees 1100. Now the coupon rate is 10 percent on the face value of 1000 rupees.
But you buy it for 1100 rupees. But the company or the government will pay 10 percent on 1000 rupees. The bond issuer will not see that you are buying it for how much amount.
If you buy the bond more than its face value then your return will be low, as well as if you buy less than its face value then your return will be high.
So your return is not depending on your coupon rate. It is depending on the price you buy that bond from the secondary market.
There are two more important things you should know. One is tenure. If the tenure is 5 years then after 5 years you will get your principal amount back in your account. And the interest rate will be credited yearly.
You need to also check the yield to maturity. Yield to maturity is the total expected return for an investor if the bond is held to maturity.
This is a very important thing. Always check these ratings when you are selecting a bond to invest in.
1.Triple-A(AAA) bond rating is the highest rating bond.
2.AAA bonds are considered the absolute safest.
3.These bonds have a low risk of default, thereby making them the most creditworthy.
Always look for the time as long as you can invest your money. You can sell your bond in the secondary market but as we discussed before that there is no guarantee you can get the perfect buyer who can give you that much money you want for that bond.
It is also possible that no buyer will buy your bond.
3.Types of Bonds. ( What are the bonds and how to invest in them )–
You can find government bonds/G-secs/state development loans (SDL) in the market. It is assumed that these are the safest bonds available in the market. Because it is a government bond.
Then comes- Public Sector Undertaking. It is not related to the government directly but the government has the majority shareholding in it. You can’t say that this is 100 percent safe. But you can say this is a very low-risk bond. It is also one of the safer options.
Now the Corporate Bonds. These bonds are issued by private companies. Like there are bonds of TATA, TVS which you can say a very good bond but there are also some bonds available that are very risky.
These are 3 major categories of bonds available.
4.Is the bond risky.?–
The first risk is a credit or default risk. That means you can lose your principal amount also. But in government bonds, the risk is very low. As well as if the bond is a very good company’s bond then also the risk is very low.
You need to go with an AAA credit rating if you are investing in a private company’s bond. It is must be needed.
The second one is liquidity risk. You can’t sell your bond before the tenure. You need to wait till redemption. Like if you want to sell a bond which’s tenure is after 10 years from now then you need to wait for that time. You will get the money but not before the tenure.
The third one is interest rate risk. As we discussed before the bond’s value will fluctuate. It does not depend on your bond’s coupon rate. It is dependent on that bond’s price which is coming to the market.
So your bond’s intrinsic value is always affected by the interest rates available in the market.
These are some major risks you should remember.
5.How to invest.? ( What are the bonds and how to invest in them )–
If you want to buy bonds there is a good website you can check. It is SEBI registered. As well as you can buy or sell it from your Demat account.
6.should we invest in bonds.? ( What are the bonds and how to invest in them )-–
If you are not satisfied with the FD’s return as well as you want a regular income then you can go with some safe bonds. And if you got a bond less than the issue price then it is also very good.
1.How does investing in bonds work?
Bonds are issued by the government and the corporates when they need money. By investing in the bond you are giving a loan to the issuer. They agreed to pay a certain percentage of interest.
2.What type of bonds should I invest in?
As we discussed before choose a government bond or a corporate bond with the AAA credit rating.
3.How do beginners invest in bonds?
You can invest through some various trusted apps available in the market or you can invest from the DEMAT account. You can open a DEMAT account for free today.
4.Can I lose money on bonds?
Yes, you can. But if you invest in a government bond or in a corporate bond with an AAA credit rating the risk becomes very low.
5.What are the disadvantages of bonds?
There are three major disadvantages available to it. These are- Credit default risk, liquidity risk, and interest rate risk. To know more check out Is the bond risky? heading in the article.
6.Benefits of investing in bonds–
You can get an interest rate that can be more than FD. As well as you can generate a regular income from here. But you need to choose some good bonds.