Owing to the unparalleled demand from retail investors, a large number of companies such as Mahindra and Mahindra Financial Services, HDFC, SBI, India Infrastructure Finance, etc. are either offering or are planning to offer bonds. While these bonds seem promising, and to an extent they are, there are certain aspects that need your due diligence before you buy bonds online. Some of them are listed hereunder –
Present-day bonds are offering an annual interest rate ranging from 8 -11%, with a yield of around 9%. Since this is relatively higher than the interest rate offered on bank deposits, you may consider investing in bonds. However, this is largely true for corporate bonds, and may or may not hold good for government bonds. Again, with higher returns comes a slew of risks, which is why it is essential that you also take into consideration the other aspects mentioned below.
One of the most significant risks in the case of bonds is the issuer’s default in making the payments. Here there are two major types of defaults you might be subjected to –
- Delayed payment of the coupon
- Non-payment of principal investment at maturity
To ensure this does not happen, always look out at the rating of the bond by one or more authorized agencies. The better the rating, the lower are the chances of such default. Hence, make sure you do not invest in a bond that has a relatively poor rating.
Yet another aspect to look out for is the happenings in the industry, to which the bond-issuing company belongs. If the market speculations for the said industry indicate a rough patch, chances are that the company might default. In such a case, the interest demanded by the investors witnesses a spike. Just in case, you’re not well versed with the market trends, you can still rely on ratings to check whether a bond is worth your investment or not.
While ratings give you a fair prediction of the trustworthiness of a bond. You need to understand and analyze how much risk can you take. You should strategize your investment and balance your portfolio. Doing so will help you stay ahead of the curve, and will save you from investing in a bond that might suffer a reduction in price in the foreseeable future.
Most bonds come with a maturity period ranging anywhere between 5 and 10 years, and more often than not, premature sale of bonds leads to a lower price point forcing you to incur losses. To avoid this situation, carefully consider your liquidity needs in the coming 5-7 years, and only then make an investment. It is good to invest in the bonds that are in demand so that you can easily sell these bonds in the secondary market.
We hope that you’re now aware of some of the aspects that need careful consideration on your part before you dive into the otherwise attractive and rewarding world of bonds.