Bonds are investments in which you pay a certain price for a fixed amount of money in return for a promise to pay back that amount in a certain number of years. Bonds also give you the option to pay interest on them, which is why they are sometimes referred to as interest-bearing investments. Bond investment can be a rewarding way to invest in the stock market. Bonds are like savings accounts that pay a fixed rate of interest and are backed by the full faith and credit of the government.
Let us understand if bonds are a safe investment right now, how you can buy bonds online, and the possible factors that could affect the bond market.
1- Are bonds a safe investment right now?
Investing in debt securities, especially government bonds, is considered a low-risk investment compared to investing in stocks or common stocks. Of course, when the risk is lower, the yield on a bond is also lower than the return on stock but suitable for interest-paying streams. Although the Indian bond market has matured in recent years, there is still a long way to go. Participation, especially that of retailers, is lower than in other countries. According to a report by Morgan Stanley, at the beginning of 2022, India could be included in the global bond index and have Rs 2.25 trillion, and the bond investment could be very safe.
This could attract more capital into the Indian bond market, thereby increasing liquidity and building confidence in the Indian bond market. However, there are several factors that could affect the Indian bond market, like economic instability, political disturbance, interest rates, etc. Other than this, global issues like the rapid rise in Fed rates and the Russia-Ukraine War are also likely to impact the bond market.
2- How to buy bonds online?
Nowadays, with the help of technology, it has become easier to buy bonds online. There are multiple platforms present on the internet to buy bonds online. Investors can purchase bonds through a debt broker or through an online platform.
3- What are the factors that could possibly affect the Indian bond market now?
Let us look at some factors which basically affect the market structure in the long term:
1- Fed raises interest rates
Federal Open Market Committee (FOMC) in December 2021 thinks it could consider raising Fed rates up to three times. Due to COVID19, inflation is at a near four-decade high, and the unemployment rate has not returned to pre-COVID levels in the United States.
Thus, it has the ability to raise interest rates to combat inflation. The Fed’s rate hike could affect both developed and emerging countries.
Almost all major countries are taking steps to match Fed rates. The RBI may also raise interest rates in the coming months in India, although they do not come in February 2022.
The Bank of England (BoE) raised interest rates by 25 basis points to 0.50% to curb inflation. The European Central Bank (ECB) left its deposit rate unchanged at 0.50% but is expected to change it in the future.
For investments in bonds, this means that if interest rates rise, the value of the bond will fall, resulting in losses for investors who do not hold the bond to maturity. However, investors who want to buy a bond in the future and hold the bond until maturity can benefit from rising interest rates as they will receive a higher coupon.
2- Russia Ukraine War
In recent months, there has been news that Russia has attempted to invade Ukraine. For this reason, globally, markets are bearish, and volatility is relatively high. However, when the stock market is depressed and there is political and economic turmoil, people turn to a more reliable and safer investment, bonds. Government securities were then considered a great investment.
3- Budget 2022
According to the Union budget, the central government plans to borrow Rs 1.95 lakh crore through the sale of securities on a compounding basis in 2022-23 (April Mar); this is a very large amount. This could mean more supply than demand, causing bond prices to drop.
We know that prices and yields are correlated, so government bond yields (which are the safest bonds in India) will increase if prices fall. As a result, the new Gsec will come with higher coupons than the old Gsecs, making them a lucrative option for investors.
Bonds are an investment that can provide a reliable source of income and long-term growth, but there are risks since you cannot touch them until they mature. The factors mentioned above are likely to affect the Indian bond market and the interest rates too. However, bonds are a great investment to help you build a strong portfolio and protect your savings if the market turns bearish. You can buy or sell these bonds at any time, which makes them a great option if you want to achieve long-term financial goals and save for retirement.