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7 Things they DON’T tell you about Bonds in India.

Writer # Indiabonds | September 1, 2021

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In our endeavor to educate people on the benefits of investing in Bonds in India (specifically corporate bonds), we believe in writing on aspects investors must be aware of. Keeping in mind the extent of plagiarism and verified information, we realize there exists a dearth of original thought. Before we begin, for all essential terms and concepts to know before you invest in bonds, please refer to our comprehensive FAQs here https://www.indiabonds.com/frequently-asked-questions/

Here is a list of 7 critical points relating to investing in bonds, that most people DO NOT tell you –

1. Bonds are NOT Stocks

Almost everyone in India is crazy about stocks and the possibility of high returns. But this comes with a price – high market volatility and potential for big losses.
Bonds, on the other hand, provide stability with consistent income over years, and capital protection. One must buy bonds when they have achieved a degree of capital stability and want to preserve/save money in addition to earn interest. Allocate a part of your portfolio to bonds to earn stable income that will principally help in diversification of risks.

2. Credit Rating is important

Almost all corporate bonds in India have a rating which tells us about the strength of the underlying company. This is provided by credit rating agencies which are regulated by SEBI. The highest rating is AAA and then there is a scale down to AA, A, BBB, BB, B etc right upto D where D stands for a company in default

Generally, bonds with ratings below single A are deemed risky.

Ensure that you check the ratings before investing and also periodically monitor your bond portfolio for changes, if any.

You can verify your bond details at IndiaBonds which is India’s 1st Bond Directory

3. Maturity Date

Pay attention to the maturity date of the bond – i.e. the time before you are paid back your principal.
Longer the maturity date, riskier is the bond as its price will move more with market changes, versus a bond that matures in 0-2 years.

For example, if interest rates move up by 1.00% (100 basis points), price of a par 1 year bond will fall just by 1%, but price of a 10 year bond will fall by 7%.

4. Call and Put Date

‘Call Date’ means the issuer has the option to pay you back you principal prior to the maturity date. This is crucial for bonds that are in high demand and trading above face value of 100, as the investment returns could be hampered if issuer Calls the bond ahead of maturity.
‘Put Date’ means the investor has the option to demand principal back from the issuer before maturity date. This is beneficial for investors buying bonds that trade below par.
Hence, it’s better to be prudent and clarify if there are any Put/Call dates on the bond you’re interested to buy, and price them to those relevant dates instead of its Maturity Date.

5. Fear mongering of default

Countries go through economic cycles of highs and lows. The recent credit cycle of rising NPAs in India left a few companies in stress that lead to their default. This does not mean bonds in India are bad. To safeguard investors, the government and RBI have come up with very effective resolution laws under the Indian Bankruptcy Code (IBC) which helps investors recover money from fraudulent companies thereby strengthening the rights of bond investors. In the past, several stocks have lost close to 50-100% of their value however people haven’t stopped buying equities. Remember to research the issuer while investing in corporate bonds.

6. Complex fixed income securities

There are a plethora of companies selling ‘fixed income’ products that are marketed safe to invest. Here are some points to keep in mind while investing.

  • Research the underlying collateral of the bond you are looking to buy or what it is backed with.
  • Don’t get swayed by attractive interest offers. as some might be unsecured or backed by complex formulas.
  • A few bonds may be issued by small subsidiary companies that are a part of a large company. In this case the risk is much higher.
  • Research whether the bond is senior or subordinated. In case of stress, subordinated bonds rank lower in priority and have a higher possibility of getting wiped out in in the event of bankruptcy.
  • New investors should preferably buy simple vanilla bonds.

7. Bond Investment Online

As with everything else, bond investment online is becoming easier and transparent. But just ease of online investment does not tell you about the underlying risks.

  • Ensure that your online payment is through secure methods or gateways which are approved by regulators.
  • Check to whom you are actually transferring your money – this is counterparty risk.
  • Research whether the provider is a financially sound firm, regulated, part of a larger financial house or is the payment being made directly to the exchange.

Investing in a standalone online firm is risky.

IndiaBonds is backed by the expertise of AK Capital – a strong bond house who is regulated and been in business for over 2 decades. With IndiaBonds stay reassured of payments safety and security too.

Bonds in India are a US$ 2 trillion asset class that offer relative safety and stability to investors. It is now opening up to retail through transparency of information and pricing. Stick to these basic thumb rules and you are good to go! Start your investment journey with IndiaBonds! Explore our bond offerings here https://www.indiabonds.com/explore/

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.