You might have heard the old saying “Do not put all eggs in the same basket!”. In terms of investing, what does it exactly interpret? It means that one must always try to diversify portfolio and not put all money in one stock. But does this diversification have any boundaries? Can you diversify outside the equity market? You may think that diversifying outside the equity market may compromise on the returns and you may have to settle for lesser returns from the Bank Fixed deposit. Also, the fact which cannot be ignored here is the risk element in the equity market which is considerably high than the risk-free bank deposit.
But what if there is something that will give you better returns than Fixed deposits and that too at a similar risk. Yes, it is indeed possible, it can be done through investing in Bonds! Financial Bonds!
Bonds are the way through which the Companies can raise money for their projects from the common people. But why would the entities try for this source of finance and why can’t they raise money simply by raising bank loan or issuing of shares?
Raising money through bank loans can be a cumbersome task for the companies, as the banks may put up some unreasonable conditions with respect to the loan interest and other specification. And raising money through issue of equity shares would dilute the existing shareholding pattern. So, the way out for the companies is to raise money through issue of bonds. It is a win-win situation for the company as well as the investors as the it is cost effective for the Companies and the investors get better returns on their investment as compared to the bank deposits.
The financial bonds are also issued by the Government of India (eg. NHAI Bonds). So, one must diligently identify as to where to invest, in corporate bond or in Government bond. The corporate bond may offer more interest as compared to the government bond but it might be riskier. So before buying the corporate bond, one should study about the financial position of the company, the coupon rate of the bond and its maturity period. The ratings provided by the credit rating agency like CRISIL and ICRA also helps to analyze the default risk and make informed decision.
CA Kushal Devadiga
kushal.devadiga@gmail.com