Bond with the best
BONDS/DEBT INSTRUMENTS
TO INVEST IN 2011
BONDS/DEBT INSTRUMENTS
TO INVEST IN 2011
By Arvind Chari
Fixed income instruments account for a significantly large proportion of the financial savings of individuals. By its very word, in a fixed income instrument, the annual realizable return is specified upfront at the then of investment. Take, for example, bank fixed deposits or small savings schemes or provident funds, where the investor is aware of the rate of interest and the maturity period/lock in at the time of investment.
As fixed income instruments remove the uncertainty of the likely returns over a time period, it has become the most accepted mode of channelizing savings and dominates a major share of one’s overall asset allocation. Fixed income instruments offer relatively lower rate of returns as against investing in equities or real estate. But, of course, there is more to fixed income investing than bank deposits and NSCs.
Fixed income markets are typically institutional in nature, where they trade short term and long term government and corporate bonds, commercial papers and asset- backed securities (securitized structures) in wholesale economic lot sizes. But today with the presence of tax efficient investment vehicles like mutual funds and with some bonds listed on stock exchanges, retail investors can participate in the fixed income markets in a more active manner.
As fixed income instruments remove the uncertainty of the likely returns over a time period, it has become the most accepted mode of channelizing savings and dominates a major share of one’s overall asset allocation. Fixed income instruments offer relatively lower rate of returns as against investing in equities or real estate. But, of course, there is more to fixed income investing than bank deposits and NSCs.
Fixed income markets are typically institutional in nature, where they trade short term and long term government and corporate bonds, commercial papers and asset- backed securities (securitized structures) in wholesale economic lot sizes. But today with the presence of tax efficient investment vehicles like mutual funds and with some bonds listed on stock exchanges, retail investors can participate in the fixed income markets in a more active manner.
Here are some investment options available in fixed income markets that one can consider in 2011.
Long-term gilt (government securities) or income funds: These are mutual fund schemes investing in government bonds and/or corporate bonds. These funds offer the best avenue to participate in the fixed income markets for any retail investor.
Rationale for Investment: Long term interest rates are most likely set to fall, as inflation will ease in the coming months and RBI looks hesitant to increase interest rates as aggressively as it did in 2010. The 10-year government bond yield is already trading at above 8 per cent, which offers good value and margin of safety.
Things to consider before investing: Choose funds with long term consistent track record with adequate disclosures on portfolio composition and credit quality. Look at the investment plans carefully for lock in periods, exit loads and taxability. Try and ask the fund house about the views of the fund manager and the portfolio positioning.
Although these funds invest in fixed income instruments, there can be losses in the portfolio if interest rates rise, leading to realizing a lower NAV than when invested at any point in time. At the same time, most of these funds would offer daily liquidity and one can redeem their investments as and when required or on having achieved the targeted return.
Retail bond issuances
Recently, there have been quite a few instances of corporate raising money from retail investors through issuance of bonds which would be listed and traded on the stock exchanges. The most recent one of State Bank, of India (SBI), was a major success, with the issue being heavily over-subscribed. There were two major reasons for its popularity— that it was an issue by SBI, and also the rate offered was higher than those available in the institutional bond market.
Rationale for Investment: More of such bonds will increase the retail culture and deepen the corporate bond markets. These bonds are almost always available at higher rates than market levels during the public issue. Once listed, one can buy and sell, depending on the view on interest rates.
Things to consider before investing: Issuer details, credit rating (stick to AAA/ AM-), tenor, interest payment structures, buy back clause, put/call options. Although pricing these bonds is not easy (there are financial calculators available on internet), these bonds, if priced correctly, can be used to trade and express ones views on the direction of interest rates. Gadge is manager, marketing & business development, Financial Planning
Standards Board India.
Recently, there have been quite a few instances of corporate raising money from retail investors through issuance of bonds which would be listed and traded on the stock exchanges. The most recent one of State Bank, of India (SBI), was a major success, with the issue being heavily over-subscribed. There were two major reasons for its popularity— that it was an issue by SBI, and also the rate offered was higher than those available in the institutional bond market.
Rationale for Investment: More of such bonds will increase the retail culture and deepen the corporate bond markets. These bonds are almost always available at higher rates than market levels during the public issue. Once listed, one can buy and sell, depending on the view on interest rates.
Things to consider before investing: Issuer details, credit rating (stick to AAA/ AM-), tenor, interest payment structures, buy back clause, put/call options. Although pricing these bonds is not easy (there are financial calculators available on internet), these bonds, if priced correctly, can be used to trade and express ones views on the direction of interest rates. Gadge is manager, marketing & business development, Financial Planning
Standards Board India.
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