Hyderabad: Governments and Corporations issue bonds to borrow money for their cash needs. Investing in a bond means giving a loan to the issuer for a fixed period. Instead, the principal amount is returned on maturity, paying regular interest. A bond will be issued in lieu of your investment. Some bonds pay interest monthly, while some pay interest every three to six months, or annually.
Suppose you invest in a bond of Rs 1,00,000 for 10 years at 12 per cent interest. Then you can get an income of Rs 1,000 per month. Bonds can be said to be an attractive option for those who need steady cash flow or long-term interest deposits.
Regular: Bonds offer a guaranteed interest rate. Investors can accurately predict their returns compared to other investments.
Risk: Bonds have less uncertainty as compared to shares. Capital does not suffer much when the market is falling.
Pros and cons: Bonds have fixed tenures. Investors can take these for the duration of their choice. Depending on the financial goals, they are suitable for deciding the durations.
Bonds, an alternative to FDs?
- Fixed deposits are what most people think of as a guarantee of investment. And it is natural to doubt whether these bonds are a substitute for these. Bonds can be considered when choosing a different scheme besides FDs.
- Bonds are a good option for those who want to receive income every month Bonds generally pay a higher rate of interest than fixed deposits. You can choose maturity dates according to your investment tenure.
- Bonds can be easily traded on exchanges. These are convenient for investors when they need cash and want to adjust their portfolios. On the other hand, if the fixed deposits are withdrawn early, there will be a penalty. It prevents the mobilisation of funds for changing financial needs.
- Bonds do not have a fixed lock-in period. Depending on market conditions, investors can sell them. There are no delinquent fees for withdrawal.
- Although bonds offer many advantages, there are some limitations and disadvantages.
Interest rate: There is an inverse relationship between bond prices and interest rates. If interest rates rise, the value of bonds will fall. This affects the investor's capital.
Risk of loss: There is no risk of bankruptcy by the issuer of the bonds. This situation usually occurs in lower-rated bonds.
Inflation: Inflation tends to increase over time. When looking for fixed interest, the yield offered erodes purchasing power. Bonds may not yield returns, especially with rising prices.
Cashing in: Some bonds cannot be quickly sold on exchanges. Then there may be difficulty in converting to cash. A minimum delinquency fee is applicable on FDs. It does not have that flexibility.
Investing in bonds is easy: A Demat account is necessary to invest in bonds. We should know all the details before investing in bonds. If necessary, take financial experts' advice, according to Vishal Goenka, Co-Founder of IndiaBonds.com.
