Five Common Mistakes to Avoid At the Time of Investing in Bonds 

One of the best facets of the securities market is its diversity. There is a wide array of asset classes you can choose to invest in, ranging from equity shares to bonds, mutual funds to debentures. You can diversify your portfolio by investing in various types of financial assets. 

Furthermore, you can spread your investments across sectors to reduce the overall risk exposure. If you are looking to add fixed-income securities to your investment portfolio, bonds may be a suitable option. In this article, we shall discuss how to invest in bonds in India and some common mistakes you should steer clear of in the process. 

What are Bonds? 

Before we delve into how to invest in bonds in India, let us briefly discuss the meaning and concept of bonds. Classified as instruments of debt, bonds are financial instruments issued by either the government or a corporate entity. 

Bonds carry a fixed interest rate and maturity and are generally considered low-risk securities (unless issued by a non-credible entity). When you invest in a bond, you lend money to the issuing entity. Government-issued bonds are usually considered the safest bond investments, followed by those issued by AAA rated companies. 

How to Invest in Bonds in India 

If you are wondering how to invest in bonds in India, the answer is fairly straightforward. To begin with, you must choose which type of bonds you wish to invest in. You can choose from a variety of bonds, including government bonds (including Sovereign Gold Bonds), corporate bonds, Reserve Bank of India (RBI) bonds, and convertible bonds. 

To invest in bonds, you can reach out to registered stock brokers. After the completion of the issuance of corporate bonds, they can be purchased and sold in stock exchanges. Bonds issued by the government can be purchased via RBI Retail Direct, NDS-OM secondary market, or through a stockbroker.

Common Mistakes to Avoid At the Time of Investing in Bonds 

Now that we have discussed how to invest in bonds in India, let us delve into some prevalent mistakes that you must avoid while investing in a bond. 

1. Not considering the credit rating of the issuer

The foremost mistake when it comes to investing in bonds can be non-consideration of the credit rating of the issuer. Every corporate entity is assigned a credit rating by major credit rating agencies, and this rating is a barometer of their credibility. It is advisable to invest in bonds issued by the government or by corporate entities with AAA rating from CRISIL and/or ICRA. 

2. Not checking the past financial records of the bond issuer

Since investing in a bond is essentially lending money to the issuer, it is critical to check their past financial performance, including revenue, profit, cash flow management, tax payments, etc. Furthermore, you must also check their debt repayment history. It is prudent to invest in the bonds issued by profitable companies with a healthy cash flow and positive debt repayment history. 

3. Not being mindful of inflation

While it may be feasible to invest in a bond with how to calculate bond yield so as to undertake less risk and balance your portfolio, it is pivotal to understand that the bond may be an unprofitable investment if the yield is below the rate of inflation. 

4. Not taking stock of liquidity

As is the case with any investment, liquidity matters when it comes to investing in a bond. Should you need to sell your investment in bonds, there must be ample liquidity in the market for there to be buyers for the same at a fair price. Bonds from highly rated companies usually carry a high degree of liquidity. 

5. Not understanding the implications of a bond’s tenure and the impact of interest rate movements

The prices of bonds are inversely related to interest rate movements. The longer the tenure of a bond, the longer its exposure to interest rate fluctuations. It is, therefore, pivotal to choose a bond with a tenure that aligns with your investment plan. 

To Sum it Up 

We hope this guide on how to invest in bonds in India and common mistakes to avoid in the process is informative for you. While choosing a bond to invest in, you must consider a variety of factors, including the interest rate, tenure, risk, financial history of the issuer, and your own investment goals.