What do you know about bonds

 

What do you know about bonds?

Very few people invest in bonds in India. Bonds are essentially loans that you give to companies or the government.

When you buy a bond, you are essentially giving your money to an institution that is promising to pay back the money you borrowed, along with an interest rate fixed at the time of the loan.

So far, simple enough.

Here is where it gets a little more complicated.

You can also sell bonds to other people.

Basically, you bought a bond from Company X (basically, gave a loan to Company X).

The company has said that it will pay you on a certain date.

You can sell this bond to someone else and when the money-back date comes, the company will pay back the bondholder - the person to whom you sold your bond.

Of course, this is over-simplifying it, but it will give you a rough idea of ​​how it works.

Needless to say, the price of any bond can go up or down depending on the demand and supply of bonds in the market.

Many investors are able to make higher returns (when compared to the promised rate in the bond) by simply selling the bond at a favorable time.

The rate of interest varies from organization to organization. Those that are more reliable are able to borrow (and therefore give you) a lower interest rate.

By this logic, the government (the safest organization in any country) offers the lowest rate of return (and the lowest risk).

There is another way to invest in bonds -- one that is more popular among retail investors.

Like we learned yesterday that you can invest in stocks through mutual funds, you can also invest in bonds through mutual funds.

Mutual funds that invest in bonds are called debt funds.

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