Skip to main content

Want to invest in bonds? Here's what to look at

 

INVESTORS looking for various options for investment in debt should be considering the various long-term alternatives that are available to them.

This is necessary because these long-term investments represent a route through which they will be able to lock in the interest rates for an extended period of time. Financial institutions including banks have been issuing bonds of this nature at regular time intervals.

While looking at these options there are a few things that need to be considered in determining the suitability of the investment.


Income flow: The flow of the income from the instrument is important because the rate of returns is just one part of the equation. There might be a higher rate of return but this might not be available in cash on a regular basis so this will have to be considered.

For example several of these bond issues are in the nature of deep discount bonds, which pay the interest only at the time of maturity. This means money after 10 or 15 or 20 years at the time of maturity.

Others have an option for payment of interest on a regular basis or on a cumulative basis. The available option has to be matched with the requirement of the individual investor.


Taxation: Another aspect impacting the final return for the investor, is the taxation of the income earned on the bonds. In most cases these are not tax-free bonds so that amount that is earned will be taxed in the hands of the investor.

This puts those in the highest tax bracket in a situation where 30 per cent of the earned amount will be lost to taxation. In such a case the investor has to make the calculation before the investment to en sure that the actual rate of return after taxation is known and this is used for a like to like comparison with other alternatives.


Redemption options: There are also two types of options that are available on long-term bonds and use of either of these can throw the entire planning out of gear.

The put option refers to the option available for the investor to return the bonds to the issuing entity after a certain period of time. This option is important for the individual because they can then ensure that they can redeem the bonds earlier but only on specified days in case they want the funds back.

On the other hand the call option refers to the right of the institution to call back the bonds for redemption before the due date. The time periods when any of the options is available is mentioned in the investment information so this has to be considered while planning for the investment.


Coupon rate change:
There are also bond investments where the rate of interest or the coupon rate can change after a specified period of time. This can happen when specified conditions are met and can be something like a situation where there is no redemption at a certain time point which will lead to a higher interest rate for the remaining tenure.

A rate rise like this is also known as a step up rate because the rate is rising for continuing investment.


This kind of rate change has to be factored in right at the time of the investment so that when the actual change occurs this does not come as a surprise.


Liquidity: Another factor that has to be considered is the liquidity of the instrument. There are some bonds where there might not be any liquidity and an investor who is looking to invest for the long term and needs some liquidity might have to reconsider the available options.

In other situations there is a listing that is made on the stock exchanges and while in theory this might provide the liquidity, the actual volumes and the ability to transact has to be seen for the real situation to emerge.

 

Popular posts from this blog

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now