Good Time To Invest In Bonds Is Now! Probably
Even the newcomer in the investment field knows that Reserve Bank of India has raised interest rates 13 times since March 2010. You might have also heard that it is bad for Indian economy as high interest rates is the result of high inflation and culminates in slow economic and industrial growth. However, there is the positive side of it as well.
Just two years prior, investors were ready to buy corporate bonds of 8.50% coupon rate. Today we are getting bonds with similar risk at coupon rates of as high as 12.50% and guess what, they are trading at discount with the yield-to-maturity (YTM) of more than 13.00%. So, why not grab them?
Well, buying bonds is one thing and when to buy bonds is another. We believe that NOW is the best time to buy them. Here’s why-
Peak Interest rates
This is definitely the main reason. Almost every big financial institution is of belief that interest rates have peaked in India. So, you may not get better interest rates in near future than you are getting now. It is an opportunity to grab, as most analysts have reiterated several times.
CRR May come down
Pressure is mounting on RBI to cut CRR by atleast 25 basis points (0.25%) very soon in order to ease liquidity in system. In fact, RBI governor D. Subbarao has also indicated that there might be a CRR cut soon.
Profit due to decrease in yield
If you buy long term bonds now, you might gain in short term due to decrease in yield. Let’s take a hypothetical example.
A bond has 12.50% coupon rate with 10-years YTM of 13.00%. The Rs. 1000 bond must be trading currently at Rs. 972.87. Suppose you buy it today and after 1 year our economic condition improves and interest rate comes down. Taking a conservative view, let’s assume 9-years YTM after 1 year for similar bonds is 12.00% (down 1 % from now). In this case the bond price will shoot to Rs. 1026.64.
So, your gain after 1 year will be the coupon payment of Rs. 125 plus the capital appreciation of Rs. 53.77. This sum up to profit of Rs. 178.77 on the payment of Rs. 972.87 resulting in 1 year percentage profit of 18.38%
Which bond to buy?
Always buy bonds or NCDs of known and established companies because the risk factor is low in such bonds and it helps you take advantage of decrease in YTM. Another important thing is, at this point of time, buy bonds with long maturity even if you want to invest for short term. As explained in above example- longer the maturity, the more the capital appreciation due to decrease in YTM
Probably
The last word in the title is the most important. Nothing in investment field is for sure. Whatever mentioned in the article is what we expect. There are always contrary possibilities. What if global economy melts down? What if inflation does not eases? What if interest rates increase further from here? What if…. The questions always remain.
You can check prices of NCDs trading on NSE from here and track latest NCDs from here
If you have any query, feel free to leave comment below. To invest in NCDs you can contact your broking house or fill this form
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