Equities and bonds are two of the most popular investment options among retail investors. While equities are more suited for high-risk investors, bonds are suitable for investors with low-risk profiles. In this article, we will focus on bonds and if you should directly buy bonds or not.
There are two ways in which you can invest in bonds – through mutual funds or directly. Debt funds invest in separate corporate bonds allowing investors a wide variety of choice to choose among debt mutual funds. If you are planning to directly invest in one of the corporate bond funds, here are a few things you must be aware of:
Are you aware of credit risk?
All types of bonds carry different levels of default risk and credit risk. Credit rating agencies such as ICRA (Investment Information and Credit Rating Agency), CRISIL (Credit Rating Information Services of India Limited), CARE (Credit Analysis and Research Ltd) rate a bond issue basis the firm’s financial ability to repay the capital and pay back interest on time to its creditors. For instance, bond which is rate AAA by a reputed credit rating agency is considered to be the highest quality bond. On the other hand, a D rated bond is poor quality bond.
If you wish to buy bonds directly, make sure that you check the published credit rating of the desired bond that you wish to invest in. However, note that this is not foolproof and a definite indicator of the performance of the bond. Even bonds rated AAA can downgrade in the future and default.
Can you sell when you want to?
Purchasing a bond is just one part of the mutual fund transaction, the other is selling it. An investor can successfully do this by either waiting for their bond to mature or selling the bonds on the secondary market. For instances when you wish to get your hands on your money sooner than planned, you might look for considering the latter – selling your bonds.
However, one should note that selling a bond is easier to accomplish if it is listed. Also, one must note that tax benefit of 20% capital gains tax per annum along with the benefit of indexation is applied to bonds for debt funds hold for a duration of either three years or more. However, not all bonds get listed successfully. And even if a particular bond is listed, there might be issues with trading volumes and liquidity on bonds. A low liquidity and trading volume on your bond could mean that you might have to compromise with a lower expected price on sale of your investments. And if the bond is not listed, then the selling of the bond may or may not occur, conditional on if you successfully find a buyer or not.
A lot of these hurdles could be solved with investments in debt mutual funds. With debt funds, you can sell your investments as and when you please. Plus, you do not have to constantly track your investments and check the credit rating of a particular bond – that’s the job of a fund manager. If you are new to the investing world, it is better to leave your investments in the hands of a professional fund manager. Happy investing!