Investment in Bond Market

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One golden rule of investing is that your portfolio should always include fixed-income products, no matter what your age is or how interest rates are moving.

Debt funds, which invest in a range of debt and fixed-income securities of different maturities and credit quality, protect you from equity market volatility and offer decent returns.

INTEREST RATES AND BOND PRICES

Interest rates and bond prices share an inverse relationship. When RBI increases rates, bond prices fall as bank deposit rates become more attractive than the interest rates on bonds. So, many investors sell bonds in the secondary market and go for the risk-free bank deposits, leading to a fall in bond prices.

Let us consider a bond issued by XYZ Corporation with a face value of Rs 100. Assume that it promises 6 per cent annual interest, called the coupon rate, till maturity. In the secondary market, the bond is available for Rs 101. For someone who buys the bond from the secondary market, the current yield on the bond will be

= (Rs 6/Rs 101)X100 =5.94 per cent.

Where Rs 6 is the coupon amount he will receive if he holds the bond till maturity and Rs 101 is the price at which the bond is trading in the secondary market.

Now, suppose interest rates are increased and the price of the bond in the market drops to Rs 99.

The current yield = (Rs6/Rs99)X100 = 6.06 per cent

So, while the coupon remains 6 per cent, the yield changes-5.94 per cent in the first case and 6.06 per cent in the second-according to the market price of the bond.

An investor who bought the bond at Rs 101 can either hold it till maturity and get 5.94 per cent annual interest or wait for the bond price to rise above Rs 101 to gain from capital appreciation.

The person who invested Rs 99 can either wait for the bond price to go up and gain from capital appreciation or hold till maturity and earn 6.06 per cent interest on his investment.

WHY DEBT FUNDS?

Though the fixed income and debt space is attractive overall, debt funds have a few advantages over the more popular bank and corporate fixed deposits.

Choice: Mutual funds offer a range of debt funds with different tenures, investment objectives and portfolio composition.

More liquid: Most debt funds are open-ended and investors can exit or enter any day.

Diversified portfolio: Mutual funds provide you the option of having a diversified portfolio in terms of credit quality, asset class and maturity.

Better post-tax returns: Debt funds are in general more tax-efficient, that is, lead to a lower tax liability, than bank and corporate fixed deposits.


To start your investment just tap on the following link.

 indicator.nivesh           PROFITMART             UPSTOX            +91-77381 33055

- Indicator Nivesh®

- Proprietor - Pratik Marathe, MBA, CFA

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