Why invest in Debt?
Debt instruments in India typically include company bond, fixed deposits, debt mutual funds, government securities, small saving schemes like like National Saving Certificates (NSC), Kisan Vikas Patra (KVP) etc. Debt are comparatively far less riskier than equities and suitable for person with low risk tolerance instruments, good and much safer for shorty term investment, fixed returns (usually not always).
Debt typically are for persons with low risk appetite. Usually in debt instruments there is relative safety of principal amount and mostly predictable rate of returns.
Need of Debt Instrument:
As discussed in run up to creation of financial plan, asset allocation, ris profile, goals etc. Investment in equity forms just a part of plan for long term investments usually for 10+ years of investment horizon. But what about short term goals, exigency funds etc. which are of shorter duration. Debt is where you can park your exigency funds, investments to meet short term goals. Debt are low risk instruments, usually with fixed maturity value and fixed term.
Bank Deposits:
Bank deposits have been India's traditional investment instruments as they are of low risk and offers security of principal amount. Deposits upto Rs. 1 lakh in any bank is protected under deposit guarantee scheme. Deposits offers fixed returns and can provide quick liquidity by pre mature withdrawal facility. Now a days banks have come out with variation on deposit scheme like auto-sweep facility to convert additional cash in your account into deposits which garners more interest than saving bank account offers, flexi-deposits, recurring deposits etc.
As said bank deposits are low risk instrument and hence offers low returns. Deposits can offer returns from 6-8 % p.a. based on type and term of deposits.
Tax benefits are also available under section 80c for fixed deposits with 5 year lock in.On fixed deposits with lock in period.
Government of India (GoI) Securities
GoI Securities in another kind of debt instruments of low risk grade. Usually GoI bond are issued to Banks, Financial Institutions, Mutual Funds, Pension Funds, Insurance companies, corporates etc. We as individual can take exposure to such instruments by investing in above mentioned institutions.
Some example of GoI securities are Central Govt. bonds, T-bills, State Govt. securities etc.
Rate of returns are usually bit higher than fixed deposits.
PSU Bonds / Infrastructure Bonds / Capital tax saving bonds:
Debt typically are for persons with low risk appetite. Usually in debt instruments there is relative safety of principal amount and mostly predictable rate of returns.
Need of Debt Instrument:
As discussed in run up to creation of financial plan, asset allocation, ris profile, goals etc. Investment in equity forms just a part of plan for long term investments usually for 10+ years of investment horizon. But what about short term goals, exigency funds etc. which are of shorter duration. Debt is where you can park your exigency funds, investments to meet short term goals. Debt are low risk instruments, usually with fixed maturity value and fixed term.
Bank Deposits:
Bank deposits have been India's traditional investment instruments as they are of low risk and offers security of principal amount. Deposits upto Rs. 1 lakh in any bank is protected under deposit guarantee scheme. Deposits offers fixed returns and can provide quick liquidity by pre mature withdrawal facility. Now a days banks have come out with variation on deposit scheme like auto-sweep facility to convert additional cash in your account into deposits which garners more interest than saving bank account offers, flexi-deposits, recurring deposits etc.
As said bank deposits are low risk instrument and hence offers low returns. Deposits can offer returns from 6-8 % p.a. based on type and term of deposits.
Tax benefits are also available under section 80c for fixed deposits with 5 year lock in.On fixed deposits with lock in period.
Government of India (GoI) Securities
GoI Securities in another kind of debt instruments of low risk grade. Usually GoI bond are issued to Banks, Financial Institutions, Mutual Funds, Pension Funds, Insurance companies, corporates etc. We as individual can take exposure to such instruments by investing in above mentioned institutions.
Some example of GoI securities are Central Govt. bonds, T-bills, State Govt. securities etc.
Rate of returns are usually bit higher than fixed deposits.
PSU Bonds / Infrastructure Bonds / Capital tax saving bonds:
The above mentioned bond are typically for medium to long term investments for tenure of 5 - 10 years. They are usually issued by Public Sector Undertakings, Banks, Financial Institutes etc. These bonds could be floating rate or fixed rate, deep discount bonds, or zero coupon bonds.
They are generally issued by way of private placement with institutional investors, or offered to public. As an individual investor they can be bought at the time of issue in the market. Such bond usuall have a credit rating provided by third party credit rating agencies like ICRA, CRISIL, CARE etc.. This ratings help us understand associated risk with the respective bond issues.
Bond usually have a fixed rate of returns and interest can be received in form of payouts at regular interval or cumulative bonds. Most f the bond get listed on security exchanges and can be traded in market. This provides liquidity to the bonds but prices will be market driven based on current value with time decay etc. taken into considerations. Some of these bond also provide tax benefits like investment Infrastructure bonds can be availed as tax benefits under section 80c or Capital Gains tax bond can provide for set off against short term or long term capital gains tax payable.
Returns on bond tend to be usually higher than traditional fixed deposits and are less riskier when compared to fixed deposit instruments of private corporates.
to be continued in my next post :)
They are generally issued by way of private placement with institutional investors, or offered to public. As an individual investor they can be bought at the time of issue in the market. Such bond usuall have a credit rating provided by third party credit rating agencies like ICRA, CRISIL, CARE etc.. This ratings help us understand associated risk with the respective bond issues.
Bond usually have a fixed rate of returns and interest can be received in form of payouts at regular interval or cumulative bonds. Most f the bond get listed on security exchanges and can be traded in market. This provides liquidity to the bonds but prices will be market driven based on current value with time decay etc. taken into considerations. Some of these bond also provide tax benefits like investment Infrastructure bonds can be availed as tax benefits under section 80c or Capital Gains tax bond can provide for set off against short term or long term capital gains tax payable.
Returns on bond tend to be usually higher than traditional fixed deposits and are less riskier when compared to fixed deposit instruments of private corporates.
to be continued in my next post :)
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