Factors to consider while investing in bonds

When investing in bonds, whether it is corporate bonds, government bonds or NCDs it is important to understand how they work, the risks involved and its ability to give the returns you expect as an investor. We’ve listed down key factors that you should consider while investing in bonds and NCDs.

1. Expected return and risk capacity

Before making any investment decision it is vital for any investor to do a self- assessment of the risks involved. Identify your risk threshold and basis this you can decide on an investment strategy that works out after considering your overall target return on investment and potential cost of risk. This is crucial while deciding to invest in high-yield bonds, investment-grade bonds, government bonds or a mix of all including bond IPO.

2. Maturity date and investment horizon

Investors should choose bonds after considering the date of expected return and their investment horizon or the duration up to which they expect to hold their investment. They should compare this to the maturity date of the bonds they’re considering for investment and choose accordingly.

3. Buy-back option of bond issuer

Another unique aspect of bonds is the buy-back option that some issuers include in the bond investment terms. This allows the issuer to redeem the bonds before the maturity date in response to market performance or falling interest rates. An investor must evaluate this aspect while choosing bonds to invest in.

4.Debt Obligations of Bond Issuer

Bonds are issued by companies as a loan, so technically investors are lending their funds to the bond issuer. So you should evaluate the bond issuer like anyone else you would be willing to give a loan to. The issuer should have a strong ability to return the principal and interest as promised. In order to evaluate this, investors must track past, present and future expected financial performance of the issuing company.

5.Whether a bond is secured

One of the most important factors while investing in bonds is to check if it’s secured or unsecured. This determines whether you will get your money back in case the company defaults or claims insolvency.

Conclusion

Yes investing in bonds is considered to be safe. However, as investors, we must look at several factors before making our investment decision and even throughout the time we hold the bond so that our investments are safe at all times.

About GoldenPi Expert

With over 15 years of experience across fixed income and debt markets, he brings deep domain expertise along with a strong focus on investor education and transparency. An alumnus of IIT Kharagpur and IIM Calcutta, his views are personal and should not be considered investment advice.

All Articles