Bonds are debt instruments and typically issued by government bodies or large corporate houses. The market for trading debt instruments (bonds) is termed as debt market. The debt market is quite popular in most parts of the world, especially in the developed countries. However, in India, it is the other way around. The debt market is mainly limited to dealing in government bonds. Yet, slowly, the debt market in India is getting more attractive for investors with many steps taken by the government in the bond market and related trading.
Usually, debt-based instruments are low risk and returns instruments and many investors do not even give a serious thought to them. In fact, debt instruments should be a part of every investor's investment portfolio. Inclusion of debt based investment instruments provides stability to a portfolio and reduces the overall risk.
The primary return from a debt instrument is the regular interest accrual. Investors can also look at getting good returns in terms of capital appreciation if the debt-based investment is made through market-tradable debt instruments. The prices of these debt instruments go up when the interest rates go down and the prices go down when the interest rates go up. Therefore, investors can expect good appreciation if they select and time their investments in debt instruments well. Since the interest rates are going up, investments in debt-based instruments are getting attractive from many perspectives such as capital preservation and low risk with good returns, and the possibility of capital appreciation if the interest rates go down.
These are some debt-based instruments available in the market:
Non-convertible debentures
Recently, many companies have floated new non-convertible debenture (NCD) issues. These schemes offer attractive returns, but investors should read the risk document carefully. Analysts' opinions should also be considered before taking investment decisions.
Investors should check the rating of the NCD, which is mentioned in the prospectus itself. 'AAA' rating is the safest rating assigned by credit rating agencies. Investors should check the company before subscribing to its NCD.
Usually, small companies float the offers in the retail markets as the bigger companies can get better rates in the wholesale markets, and hence do not offer them in the retail market. Also, the fund-raising exercise in the wholesale market turns out much cheaper than in the retail market.
Debt mutual fund
Debt mutual funds invest in debt instruments such as government bonds, fixed deposits and approved private deposits. The returns from debt mutual funds depend on two factors - interest accrued on the deposits or bonds and capital appreciation during interest rate fluctuations. Therefore, debt mutual funds draw more interest when the interest rate cycle reaches its peak and shows the possibility of interest rates easing in the future.
The debt mutual funds are better than investing directly in debt instruments as the dividend returns from debt mutual funds come tax-free in the hands of investors in comparison to the interest income from debt instruments which attract tax as per the prevailing rates.
Liquid fund
Liquid funds are good for investors who are looking at parking their funds for a short term perspective. Liquid funds invest the corpus mainly in money market instruments, short-term corporate deposits and treasury. Liquid funds are quite good in terms of funds withdrawal and usually liquidate the funds at short notice.
They score over other short-term bank fixed deposits. Returns from bank fixed deposits are taxable depending on the tax bracket of the investor, which pulls down the actual returns considerably. Dividends from these funds are tax-free in the hands of the investor, which is why they are more attractive than deposits.
