Bond Investment

What is Bond?

In order to raise funds, corporate or government organizations take loan from investor. The investor gives loan to them and in return purchases the bond.

The investor buys the bond and the money that they pay for the bond are used by the organizations to utilise in profitable projects. The investor will receive regular interest payments from the issuer until bond matures. Another way to earn money from the bond it to sell the bond at a higher price.

Lets look at the following examples.

Example 1:

In order to publish a promising book, I need money. I would take it as a loan from my friend A. A would lend me the money and in return would buy bond with a maturity date. This means A would ensure that her money would be repaid at the maturity date and also she would earn interest at regular intervals from me till before the maturity date. Another way of earning money for A would be to sell the bond at a higher price to someone else. If that other person finds that my book is very promising and would fetch greater return then surely he wont mind buying the bond at a higher price.

Example 2:

 In order to buy a home I take home loan from bank. Bank will give me the loan at lets say 8.5% interest. Now the bank will issue bond to raise fund. 
Now, more and more people will take home loan because in India recently the home loan interest rate has reduced. So the new bonds issued will have lower interest rates. This means that old bonds will be profitable as compared to the newer ones because of their higher interest rates. Hence the old bonds demand will rise and so their prices. This in turn will fetch you money from this market.

One way to invest in bond market is to invest through mutual fund. You may choose your product as bond and then go for monthly sip in mutual fund.

Through mutual fund you can invest in stocks and also in debt market or bonds. My personal favourite is DSPBlack Rock where you get options to select your scheme and check how did those schemes perform over the years.

Positive aspect of bond investment

You would get sureshot return. Sometimes you may get opportunity to convert your bonds to shares.

FD and bond investment are similar but bond is better as it helps you in saving your taxes.

Negative aspect of bond investment

Returns from bond market are less, much less than that from stock market.

So if you are a risk averse person like me when it comes to financial investment, you may choose bond investment as a safe guard.

Did you know that when stock market fall, bond market rises?? 
Also terms like yield, par value are important and relevant for this market. Also we can predict recession through all these. For all these information please wait for my next blog!