Bonds are debt instruments which have a specific maturity period and pay interest on your investments. There are two types of bonds:
- Corporate Bonds
- Government Bonds
Corporates issue bonds to finance their development plans and to fund new projects while the government bonds are issued to fund government infrastructure projects and for other capital expenditure.
Why Invest in Bonds?
Bonds have proven to be a safe avenue of investment. Unlike stock market, bonds assure you of returns on your investments.
The last few months have witnessed 70-80 basis points (bps) (100bps equals 1 percent) increase in the 10-year government security (benchmark) making its current yield value 7.15 %.
The 1-year and 3-year government securities have also risen drastically and trade as-on-date at 6.32 percent and 6.61 percent, respectively. And who is to be blamed? [Source: moneycontrol.com]
The causes behind the rising yield of bonds are the aggravation of the economy’s fiscal deficit and the plea of our struggling national currency.
Until 2017, only institutional investors like mutual funds, provident funds, banks and insurance companies could trade government bonds. After RBI changed the rules in 2017, anybody with a valid PAN card can buy and sell government bond.
So, bonds can benefit you vis-à-vis, a simple savings plan with the bank at a lower interest rate. The issuer of the bond remits the investor periodically, with the interest amount and the principle on maturity.
As we read above, the yield has been on the climb, which slyly indicates a growth in the forthcoming interest rates. This implies a fertile market and investment opportunities for your saving plans.
So, what’s the plan?
Allotting your savings to debt funds like ‘bonds’ with growing yields, proves fruitful eventually. As a matter of fact, during the last decade, soaring of bond yields have always been followed by a hike in returns in the succeeding year.
There you go! The best savings plan educates you which financial fundraising instruments or bonds to invest in, to give you the best savings in the long run.
There is a risk factor that is attached to a bond depending on the yield promised. If the return promised is low, then your principal and interest are safe. But in case the promised return is very high, then, when things go wrong; you may not only lose the interest amount, but also your entire principal amount.
Unlike when your savings are with the bank in the form of Fixed Deposits, though the return is low both the principal and interest are almost 100% safe.
But will you scrutinize the impact on your savings plan, i.e. the long-term evaluation of the market considering present yield trends and other imperative factors?
For this, you do need a seasoned financial expert, who can guide you meticulously about the best tax saving plan to get the maximum returns and make the right investment or debt instrument decision i.e. handpick the ideal saving plan for you.
Small savings schemes (like PPF, KVP, Senior Citizens Saving Scheme etc. initiated by the central government) and savings accounts in banks are profited by high bond yields.
Best of Both Worlds
Let’s understand this. It is anticipated that in an answer to the booming yields, banks are likely to increase the interest rates that they offer on Cash Deposits and Money market instruments. [Source: economictimes.indiatimes.com]
The steady rise in bond yields can systematically be a delight, a booster for your income. But this fact doesn’t leave behind the unavoidable concept of ‘investment risk’. It also goes up the ladder.
In the case of low interest rates, high bond yields pose to be very inviting. But investing in high-yield bonds is not for unsophisticated investors. So, dear reader, you must be wise and select the best tax saving plan, and mindful investment decisions for the same.
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