4 Key Things To Remember While Buying Bonds In A Bond Issue

  Author: Kundan Kishore

Bonds are typically preferred investment options for high net worth individuals and risk adverse investors due to their stable returns. Interestingly, it also attracts the attention of investors when the equity market goes through rough patches. However, investing in a bond has its own ups and downs. If you are investing in bond considering it as a lower risk investment option, here are four essential things about them that you should know.

Creditworthiness of the issuer In case of bond investing, you are actually providing a loan to the bond issuer. In return, you get interest on your money from the issuer. Needless to say, it is also important to get your money back at the end of the maturity. Therefore, you need to take a very hard look at the creditworthiness of the issuer. The default of payment could be either in the form of untimely coupon or interest payment or non-payment of principal amount on maturity. Therefore, it is important to check the financial health of the bond issuer before buying its bonds.

Returns Different bonds carry different coupon rates (interest on your investment). Look out for a bond which offers a better coupon rate. However, do not get swayed by higher returns. Remember, higher returns come with certain level of risk.

Look beyond ratings Typically, bonds are rated by rating agencies which gives you an idea about the credibility of the issuer. However, this should not be the only criteria for your investment. You should also look for the outlook of the sector in which the issuer operates.

Liquidity Consider your liquidity requirements before investing in a bond as most of the bonds come with maturity of 5 years, 10 years or more. Though bonds get listed on stock exchanges and provide the exit route through secondary market, the truth is that they are thinly traded in India. Also, premature withdrawal may expose you to interest rate volatility, among other things.