In bonds, as in any other asset class, research is a must. Knowing the ins and outs of the product as well as reading the fine print is mandatory.
Experts share the finer points that investors need to look at before investing in bonds as an asset class.
What to track before buying bonds?
While there are many factors that an investor needs to check before investing in bonds, there are some criteria that are the most important, says Suresh Darak, Founder, Bondbazaar.
– Find out the issuer’s credit rating
First, he says, start with who the bond issuer is and its credit rating. Essentially, investors should understand the company that is issuing the bond and whether its business performance provides credibility that it will make its interest and principal payments on time.
This is also reflected in the credit rating that is assigned by SEBI-accredited rating agencies such as CRISIL, ICRA CARE. Credit ratings range from AAA to D, indicating the safety of the issuer and its ability to pay on time. Higher credit rating means higher safety and lower risk.
“I always ask investors to start by looking at the credit rating of the bond,” says Pallav Bagaria, Director at Sapient Finserv.
However, I always tell investors not to stop at the rating, says Bagaria. It’s equally important to look at the company’s financials yourself, especially if you’re considering corporate bonds. Checking the issuer’s balance sheet, their debt levels, interest coverage ratio, cash flow stability, and overall financial health, can give you a much clearer picture of how safe the investment really is, Bagaria says.
– Bond maturity dates
Investors need to look at when the bond matures. Most investors typically have a time horizon in mind when investing in fixed-income instruments. Longer tenures typically give higher interest, but then investors carry the risk of movement in bond prices due to various factors. If investors need to sell bonds before maturity, then the prevailing market price could be higher or lower, and this fluctuation is typically more for longer-tenure bonds.
“For higher yields, risks are usually higher—so assessing whether the yield compensates for the risk is critical,” says Vishal Goenka, Co-Founder, IndiaBonds.com.
– Track yield to maturity
What is the yield to maturity of the bond? This is the effective return that the investor will earn, considering the purchase price, interest payments and principal at maturity. If the bond is purchased during its issuance or IPO and held to maturity, then the yield is identical to its published coupon (interest) rate. If it is bought or sold in the secondary market, then the yield could be higher or lower than the interest rate, depending on the price at which the bond was bought or sold.
Due diligence is essential when investing in bonds, say experts.
– Other factors
Also, the investor needs to look at who is issuing the bond — Is it a government body, a reputed company, or a lesser-known entity?
What is the interest (coupon) rate? Is it fixed or floating? What’s the time horizon? Bonds come with various maturities—short, medium, and long-term. Are there any call or put options? This gives a more realistic picture of your returns.
“Also, how easy is it to exit if needed? Liquidity matters, especially in the case of corporate bonds,” says Bagaria.
(Manik Kumar Malakar is a freelance writer. He writes on bonds, the stock market and personal finance.)
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
