What are bonds?
- Put simply, a bond is a debt instrument.
- It is like a loan that an investor gives to the issuer of the bond.
- The issuer could be a company, the Government, a financial institution etc.
- Unlike stocks, bonds do not give investors ownership in a company.
- Every bond has a fixed interest rate as well as a fixed maturity date, ranging from a few months to a few years.
- Types of bonds include government securities, corporate bonds, fixed deposits, small savings schemes, infrastructure bonds etc.
Why invest in debt papers like Fixed Deposits, Bonds and Debentures?
- Regular income: Bonds have a fixed income over a fixed period. This makes them an attractive avenue for individuals looking for stable income.
- Low risks: Debt papers entail lower risks. It is ideal for risk averse investors. Government bonds have zero risk attached to them. This safety element draws investors to these bonds.
- Liquidity: You can invest in bonds for a shorter duration as well, making them a highly liquid investment avenue.
Types of Debt instruments you can invest in through VSK
- Debt schemes of Mutual funds.
- Fixed Maturity Plans
- Capital Gains bonds
- Company fixed deposits
Challenges faced while investing in bonds and debentures
Although bonds entail lower risks as compared to equities and equity funds, as an investor, you have to tread with caution when it comes to investing in these securities.
Many investors fail to recognise the following aspects when investing in bonds:
- Checking the credit rating assigned to the bond - This is particularly important when it comes to investing in company fixed deposits. The credit rating tells you how safe your principal is in the given company. A company with a poor rating has high probabilities of defaulting on repayment of principal and interest.
- Not looking at real returns - It is imperative that you look at the real return given by a bond, that is, the return post inflation and tax. Overlooking this could result in you earning negligible yield on your bond investment!
- Understanding liquidity requirements - Debt investments are not a very liquid avenue, particularly long term debt investments. Once you invest, your funds get locked in till the maturity of the instrument. Also the secondary market for these instruments is not yet developed in India. Make sure that you carefully evaluate the potential liquidity, exit route and penalties of the instrument before you invest.
- Over investing in debt instruments is also a real risk as the returns may turn out to be paltry over a period of time due to effects of inflation.
Solution offered by VSK
VSK is a complete financial solutions provider and we place our client’s objectives foremost.
We understand that in order to build a comprehensive portfolio, it is imperative that you reserve a certain portion to debt instruments in order to balance risk and return.
- We help you select the appropriate debt products, keeping in mind your financial goals, liquidity and tax planning needs.
- Last but not the least; we take care of all the hassles of investing in bonds. This includes all the paperwork and documentation needs.