Investing a significant amount of their income is a practice that everyone should follow. While investing is a healthy practice, the choice of where exactly to invest is a difficult one. The ideal scenario is to diversify the investment portfolio by putting your money in investment bonds, equity shares, and fixed deposits. The choice of investing in different instruments is based on the level of risk and return one is willing to take and accept.
Another reason for investing is to save tax money. Many people invest in corporate bonds and sovereign bonds only to be eligible for tax exemption. Investors also look for a regular source of income, and investment bonds prove to be one as they have a pre-decided maturity date.
This blog explores the things that one should factor in while investing in bonds.
Things to Look For When Investing in Bonds
The most important things to know about investment bonds are their various types, the risks involved, the yield that one gets, and the credit ratings.
Types of bonds
One should be aware of the variants in the bond market. Investment bonds such as corporate, sovereign, or municipal bonds have different coupon rates and may differ in credit ratings. The investor must be aware of the type of bond they are putting their money in.
The main difference between them is the issuer. In the case of corporate bonds, different non-banking financial companies issue them, and their yield may vary depending on the respective company’s creditworthiness. Similarly, sovereign and municipal bonds are issued by the government, central/state, and local governments, respectively. These bonds are relatively less risky than investing in corporate bonds.
Understanding the Terminology and Their Relationships
Understanding terms such as a bond’s maturity, coupon rate, whether it is secured or unsecured, tax-exempt bonds or not, and callability is important. If these terms are not well understood, investors will find it very difficult to comprehend the comparison and make an informed decision.
Irrespective of whether one is investing in corporate bonds or sovereign bonds, the meanings of these terms remain the same. The coupon rate is the interest paid to the bondholders. A secured bond is a bond with a collateral-backed guarantee, whereas an unsecured bond does not have any such guarantee. There are certain bonds, the yield of which does not attract tax levies. Callability refers to the issuer’s ability to repay the amount before maturity.
Associated Risks
Investment bonds involve relatively less risk than stocks or equities, but it is still relevant to look for them for a better comparison.
- Interest Rate Risks: There is an inverse relationship between interest rates and bond yield. So, an increase in interest rates can lead to decreased bond yield. One needs to keep track of interest rate changes in the market to minimise the risk.
- Default Risks: Choosing a company with minimum default risk, that is, choosing a company with an operating surplus, is a thoughtful check in case of risk assessment.
Bond Ratings
One of the most important factors to consider is the bond rating. A bond rating is a parameter to check the creditworthiness of a bond issuer. This rating helps investors decide whether they want to invest in the respective bond. Many credit rating agencies give the true picture of a company’s creditworthiness. Agencies like CRISIL(Credit Rating Information Services of India Limited) and ICRA(Investment Information and Credit Rating Agency of India Limited) help evaluate the same.
Summing Up
There are many websites and apps that allow you to check your credit ratings and also the company’s bond ratings. One such platform where you can check your score is Stashfin! They not only help you analyse whether you should invest in a particular company but also lend money in case you need a personal loan!
So, whether you want to invest or borrow, Stashfin is where you should be!