Top 7 Benefits of Investing In Bonds in India
One common investing option in fixed income instruments is bonds. Bonds are favored by investors for a variety of valid reasons.
Understanding characteristics of bonds, benefits and drawbacks, dangers, and their capacity to provide the returns expected by the investor, is essential before making an investment in them. Learn about the key elements to take into account when making a bond investment.
Here are 7 things to consider before investing in bonds:
1. Secured/Unsecured
Bonds are divided into two main groups: secured and unsecured. A
secured bond promises its holders certain assets possessed by the issuer as
collateral for the loans raised.
This item is also referred to as a loan's collateral. In
the event that the bond issuer defaults or is unable to pay the obligation, the
assets are passed to the investors.
2. Resilience
It is the day that the bond issuer is required to return
the bond's principle, also known as the bond's par value, to the bondholders.
It should be taken into account in light of your various financial objectives.
Short-term (1 to 5 years), intermediate (5 to 12 years), and long-term
maturities are all possible (more than 12 years).
3. Preference for Liquidity
When a company is in default, it pays back its investors in a set
order. The investors are compensated in accordance with the liquidation
preference once the company sells its assets. Priority over investors and
initial payment of the outstanding debt goes to bondholders.
4. Discount Rate
Here, the fixed interest that is paid at regular
intervals is referred to as the coupon rate (generally annually or semi-annually).
The coupon rate should be taken into consideration even when it varies since
many investors use it as a supplemental source of income.
In comparison to fixed deposits, bonds are known to
give an annual interest rate in the range of 8–12% (if kept until maturity).
5. Tax Factor
Generally speaking, bond income is taxable. However, a
small number of bonds are reputed to offer the benefit of tax exemption. Green
bonds, certain government and municipal bonds' income and capital gains, for
instance, are tax-exempt. The interest rates on bonds with tax-exempt features
are often lower. Bond returns that are tax-exempt and taxable can be compared.
6. Callability
Some bonds have callable features that allow the issuer to
redeem the bonds before they mature. Interest rates may allow an issuer to
choose to call its bonds if they enable borrowing at a cheaper rate. Investors
are drawn to bonds with callable features because they offer comparatively
higher coupon rates.
7. Creditworthiness and escape routes
Default declarations by bond issuers are a significant risk
of bond investing. By taking into account the ratings given to the issuer by
the various credit rating agencies, you may estimate the likelihood that an
issuer will declare default. In particular, bonds with a Triple-A (AAA) rating
may be worth your consideration.
Additionally, take into account your need for liquidity and
align your investment horizon with the bond's maturity.
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