7 things to be considered for investing in Bonds

Every investor tends to either invest in the equity shares or in the future and options market. The only intention of the investor is to minimize the risk associated while investing and maximize the returns that they earn on the investing. The equity holders earn profits in form of dividends only when company is in profitable mode. On the other hand, we have debentures which are a type of debt instrument issued by the private companies which are not backed by any collateral. But this are also for the short period of time.

So, on the edge of all we have Bonds which also is the investment options an investor can look for. Bonds are generally a fixed income security. They, are backed by the government security. The interest on the bonds are paid on the quarterly, half yearly, annually basis.

What are the things that we should look for while investing in the bonds?

1. Define the objectives:

While investing the main concern of the investor should be why are we investing? What is the motto of investing? Is your investment objective to have enough money for your children education? Is your goal to live comfortably after the retirement? If so, how comfortable you want your life to be? You probably may have multiple goals. List them all out and be as precise as you can. Once you set your objectives it becomes easy to find the best investment option which can help achieve the goals set forth.

2. Evaluate your risk appetite:

Different types of bonds and bonds carry different risk profiles. As an investor you must know the risks before you invest. It's a good idea to note them down so that it becomes easy to select the bonds accordingly. This is crucial while deciding to invest in high-yield bonds, investment-grade bonds, government bonds or a mix of all.

3. Understanding the cost associated while buying and selling:

As we know while investing in bonds there are cost of brokerage, transaction cost, etc. included in it. Ask how your brokerage firm and broker are being compensated for the transaction, including commissions, mark-ups or mark-downs and invest accordingly.

4. Reinvest the coupons:

On the bonds we generally get coupons on quarterly, semi-annually or annually basis. So, as an investor we must always look to reinvest the coupons which we receive this allows the power of compounding to work on your behalf.

5. Risk capacity and Expected Return:

Decide on an investment strategy that works after taking into account your overall desired return on investment and probable cost of risk based on your risk tolerance.

6. Investment horizon and Maturity date:

Bonds should be chosen by investors after taking into account the expected return date and their investment horizon, or the length of time they plan to hold their investment. When making investment decision, individuals should compare this to the maturity date of the bonds they are contemplating.

7. Security of the Bond:

The first and foremost aim of the investor should be that whether the bond he is investing in is secure or not. This helps in analyzing that the investor can get his money back or not. So, this are some ways in which an investor can select the appropriate bond for his investment purpose. This helps us to understand our expectation and helps us generate the maximum income. As an investor which is the Bond you would Like to invest the most? And what are the factors that you go through while investing in the bonds.

Thank you.

Regards,

Deepali Deokar,

Kautilya,

IBS Mumbai.