Many investors are today searching for options to Fixed Deposits as the deposit rates interests keep falling. One option that can be considered by investors could be Bonds. You could call it a Non
Convertible Debenture (NCD). But most find it difficult to understand. Let me explain it in simple terms.
What does an investor want? Better returns on his investment.
What do companies want? Funds to run their business. What if needs of both are fulfilled.
So the investor gives a loan to a company. In return, the company gives a fixed rate of interest of interest on the investment. This rate of interest is called coupon rate.
ABC company needs funds for business so lets say asks for money from investors at a coupon rate of 8.5%
So suppose I give a loan of 1000 Rs to ABC company per annum., the company will give 8.5% of 1000 that’s 85 Rs.
So whats new besides the better rate of interest?
The value i.e 1000 Rs is traded on the stock exchanges. So one can get capital appreciation also with a fixed rate of interest.
suppose the price increases to 1050, will I get 8.5% on 1050?
No the interest is always given on the Face value i.e 1000.
So what if the price falls to below 1000 say 950?
You can buy it at 950 and get interest on 1000. That means you are getting more interest for a lower investment.
So your return rate goes up to 8.95%
After a particular period of time, the company returns the loan amount to the investor. Simple as that.
Though Bonds are taxable, TDS is not deducted. However one has to include it in his income.
How to chose the right investment?
Every company is assigned a rating depending upon the reliability and stability of the company. This rating is given by agencies like CARE, CRISIL etc.
There are some drawbacks though.
The biggest problem with Bonds are they are not very liquid. Thus buying from the secondary market is not very easy.
Though you may be able to buy/sell easily, getting the best price is a challenge.
Secondly, the best ones do not give a high yield as there is constant demand for them, So you can struggle to find a high yielding bond. Even if you find one, its rating will be lower making it riskier. So you can easily get a Bond with yields between 9% – 12% but then the risk is higher.
So if you want more returns than an FD and willing to take some risk, you can go with Bonds.