On 24th Feb 2022, Russia declared war against Ukraine. Sensex fell by nearly 5% on this day, and India VIX jumped 30%. During these political and economic disturbances, people generally switch to a more trusted and stable source of investments, bond. On the same day, when the Sensex fell so drastically, the India 10-year bond’s yield increased by 0.30% from the previous day.
When investors are looking to invest their hard-earned money, they want to ensure that they are doing everything possible to secure the highest return on their investment.
A bond investor can earn returns in two ways, interest (coupon) and capital gains if the bond is sold before maturity.
Usually, the investors earn a fixed rate of interest on the bond. Few bond provide a higher rate of interest compared with other similar products available in the market, and others have average or equal returns.
Bonds that provide a higher interest rate can be very attractive in a lower rate environment. Let us understand why this happens.
There is an inverse relationship between interest rates and bond prices, i.e., when there is an increase in interest rates, the bond’s prices fall. Thus, holding a bond that provides a higher interest rate will compensate for the principal loss because of the fall in the bond’s prices.
Which bond type is best to generate higher returns on your investments?
If investors are looking for bond that generates higher returns on their investments, these types of bonds might be a good option.
1. Corporate Bonds
A which is issued by Govt PSU and private companies comes under the category of corporate bonds. Whoever borrows money from investors for a set period, and pays interest on the borrowed amount which is paid at regular intervals.
The interest rate on a corporate bond is typically higher than a Bank FDR’’s or Central Government bond, as there are many factors due to which they provide better interest than other instruments available in the market.
Corporate bonds can provide good returns to investors, which might vary from one corporate to another, and return depend upon the features like Tenure, liquidity, rating, and safety.
Usually, corporate bonds provide 7% to 12% returns. Numerous corporate bond are available in the market; investors can select depending upon the risk they want to take and the tenure (short, medium, and long term). If the duration of the bond is short, the risk and return will be higher and vice versa.
2. PSU Bonds
Public sector undertakings, or PSUs, are companies in which the government has a majority ownership stake, more than 51%. These companies can be in various industries but often operate in critical sectors like Infrastructure, construction, transportation, railways, banking, etc.
Public sector undertakings (PSU) bonds are a type of bond that is issued by a public sector undertaking to raise money from the public and the institutions for their finances.
These bonds are attractive to investors because they are backed by the credit and faith of the government, and they offer a higher return than other types of government bonds. Usually, PSU bonds provide a return of 7% to 9%.
However, the maturity date for PSU bond is generally long; thus, investors are advised to evaluate the credit rating of the bond and do their research before buying PSU bonds.
3. Green Bonds
Green bonds are a type of bond that are used to fund environmental-related projects, such as reducing greenhouse gas emissions, improving energy efficiency, or promoting renewable energy.
The market for green bonds is increasing, and investors are becoming more interested in these investments.
There are a few reasons why green bond is becoming more popular. First, there is a growing demand from investors for socially responsible investments. Green bonds offer investors a way to support environmentally friendly projects. Second, they generally provide a higher return than other types of bonds.
4. Market-Linked Debenture
Market-linked debentures (MLD) are a type of debt security that are pegged to the performance of a specific market index, such as equity benchmark, government yield, gold index, etc. The value of the security will fluctuate along with the index. If the market index rises, the value of the MLD will also rise. Conversely, if the market falls, the value of the MLD will also decrease.
The key benefit of market-linked debentures is that they offer investors the potential for higher returns than other types of bonds.
Market-linked debentures also provide investors with a degree of protection against downside risk, as they come with a capital protection feature.
They are guaranteed that they will get back their principal amount on maturity, even if the market index falls severely.
Benefits of bonds investment over other investment options
Investors have a lot of investment options to select from. However, when deciding what to invest in, most people will agree that bonds are a better option than other investment options.
Here are some benefits of bonds investment over another investment plan:
One of the benefits of investing in bonds is that they offer stability. Unlike stocks, which can go up or down in value, bonds tend to be more stable. This makes them a good option for investors who are looking for a more secure investment.
1. Bonds have a lower risk than other investment options; thus, investors are less likely to lose the entire money.
2. Bonds provide regular income; therefore, it is an excellent option for investors looking for a steady stream of income.
3. They are a perfect option for diversification benefits.
4. During retirement, bonds are considered to be the best investment option as it provides a more stable return than other investment options.