The size of India’s bond market is more than $1.8 trillion or ₹100 lakh crore. But what is the bond market exactly?
Stock of corporate bonds has outstandingly grown by 4.5 times in the last 11 years
Interest rates in March, 2023
The primary market is where bonds are issued for the first time and enter the market. Generally, sophisticated investors like HNIs and institutional investors like mutual funds buy bonds from the bond issuer directly.
The secondary market is where investors can buy and sell bonds to other investors without any involvement from the bond issuer. The trading (buying and selling) of bonds can take place on a stock exchange (like BSE) or over-the-counter (OTC).
Governments, public and private companies can raise money at a low cost of capital and use the funds for productive purposes, thereby increasing the overall economic productivity.
Bondholders can earn a rate of return on their savings which results in growth in the overall wealth of the country and its citizens.
Investing in bonds can help you in multiple ways. A few use cases of bonds are discussed below:
Not all bonds are equal. Even the Bonds with higher Credit rating can perform bad.
Staying invested until the maturity date may reduce bond risks associated with reinvestment of coupons and liquidity
Yield to Maturity
Yield to maturity indicates the expected annual return of a bond if you stay invested until the bond’s maturity
What are the
risks of investing in bonds?
Bonds are generally associated with safety and capital protection. However, bonds are not 100% risk-free and may have several risks. Let’s look at the 4 most significant risks in bond investing:
Bonds are fixed-income security that allows investors to lend money to an issuer, such as a government or corporation, in exchange for interest payments over a specified period.
Bonds in India are loans where the investor acts as the lender, and the issuer acts as the borrower. In return for the loan, the issuer promises to repay the investor the face value of the bond, along with any interest earned, at a predetermined date in the future. Bonds can be a crucial tool for issuers to raise funds and fulfill their capital requirements while providing investors with a reliable source of income.
However, investing in bonds carries risks, such as credit risk, interest rate risk, and inflation risk. Understanding the various types of bonds, their risks and benefits, and how they fit into an investment portfolio is key to making informed investment decisions.
The Government of India (GOI) issued bonds that are considered to be safe to buy. State bonds or SDLs (State Development Loans) are considered almost as safe as central GoI bonds. While government bonds are safe from the ‘credit default’ perspective, they are subject to risks associated with interest rates like other (corporate) bonds.
When it comes to selecting the best bonds for your portfolio, it's vital to consider your financial objectives, tolerance for risk, and investment plan. For Indian portfolio holders, evaluating the credit rating of the issuer, the Maturity Date, and the Yield to Maturity is crucial in determining the best bonds to invest in. Seeking guidance from a financial advisor or conducting thorough research can aid in making informed investment choices that align with your goals and risk tolerance.
Bonds and fixed deposits are popular investment options in India. Bonds are like loans you give to companies or governments, while fixed deposits are like deposits you keep with a bank. Both instruments provide stability in income and capital protection and are safer and more accessible than stocks.
Learn about the differences between Bonds and Fixed Deposits by reading our in-depth blog.