The Game’s Bond! Investment Bonds!
The stock market is fluctuating like a pendulum, the interest rates for recurring deposit accounts are flimsy and new outlandish investment opportunities like crypto-currency and Bitcoins are too risky. But, in today’s inflation prone market, you need a steady saving scheme to top-up your monthly cash flow. In such a scenario, one of the most risk-free investment opportunities is Investment Bonds. Let’s see how you can select the right kind of Investments Bonds perfectly suited to your needs.
Quick Buck or the Long Haul?
- Short Term : Less than 3 years
- Mid Term : Between 3 to 10 years
- Long Term : More than 10 years
Is your return date flexible or fixed? The answer to this lies in the purpose of your investment, which brings us to our next point:
Why Do You Need Investment Bonds?
Obviously, your financial portfolio will not comprise only Bonds, but stock options, mutual funds and other investments. So the question is what purpose do your Bonds serve? If you are looking for regular interests to pay off a loan or save some money for a rainy day, you should look for short term to mid term bonds. On the other hand, if the purpose of your investment is to receive a large lump sum, you should invest in longer term bonds so that your interest can be saved up to compound your initial principal amount.
The Relationship between Principal and Interest
Remember that even though the interest you receive on your Bonds is a fixed percentage, the principal value of the Bond can fluctuate. This can alter the actual amount of interest you receive each year. The relationship between the Principal and Interest is inversely proportionate. When the value of the Bond falls, the interest rates rise, and vice versa. So a good time to buy bonds is when interest rates are falling, which means the value of the Bonds will be on the rise. Also beware that if you are investing long term, the interests tend to be more volatile and the risk is slightly higher.
Risk Management
After you pick the maturity period and the right time to buy Bonds, it all boils down to risk management. It’s true that Investment Bonds, especially Government Bonds are safer than most other investment options. But this doesn’t mean that they are entirely risk free. The trick is to balance risk and returns. The greater the returns, the higher the risk.
Such a thing as a low risk investment with high returns is just a fantasy! So what can you do to manage risks better?
Mix up your portfolio. Don’t buy the same kind of Bonds. You should invest in different Bonds with a wide spread of interests and maturity to balance out your profile. Also keep both Corporate as well as Government Bonds in your portfolio. This way, if one investment takes a hit, the other can always shield you from the damage.
Putting it to Practice
Now that we have our guidelines chalked out, let’s see an example of how we can put it to practice. The website of the National Stock Exchange of India, nseindia.com is a good place to get tabulated reports on available corporate bonds.
Let’s assume there are two bonds, X and Y that you are trying to decide between. X has a principal value of Rs. 101.3 with an interest of 8.4 %. Its previous annual yield was 8.1% and previous value was Rs. 101.5. We can see that the interest is rising but the value of the bond is falling.
On the other hand Y has a principal value of Rs. 102 and interest of 8.3%. The previous annual yield was 8.4% and previous weighted value Rs. 101.5.
It is a better option to buy the bond for Y because the value of the bond is increasing even though the interest is slightly falling, but relatively stable. Again, if you are up for bigger risks, you could buy Bonds with interests at around 10%, but if you want to play it safe, stay around the 8% line. Also, invest in Bonds belonging to companies that you are aware of like ICICI, PNB, HUDCO etc. New companies bring higher risk to the table.
So, to sum up, remember the three key factors before selecting the best bonds:
- The flexibility of your maturity period and the purpose your Bonds fulfill.
- The interest rate volatility vs. the value of the bond
- Risk management by mixing up your portfolio
If you’re entirely new to Investment Bonds, you could seek help from your financial banker or broker to decide what spread of investments would be ideal for your tailor made portfolio.
