Three strategies for investing in bonds like a pro

Three strategies for investing in bonds like a pro

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Debt instruments such as bonds are a great asset class to invest in for a well-diversified portfolio. What is a bond? Bonds are financial instruments that involve investors lending money to a corporation or the government for a specific length of time, in exchange for regular interest payments. The bond issuer returns the investor’s money when the bond matures. Bonds are known as fixed-income instruments because of the nature of the investment, which allows investors to earn a fixed return.

Different types of bonds:

  • Government bonds:
    • Issued by the central or state government
    • The rate of returns on these bonds is regarded as a risk-free rate of return
    • These bonds do not have any counterparty risk as these are issued by the government itself
  • Treasury bills:
    • Treasury bills are also issued by the Government of India
    • These bonds carry the same features as government bonds
    • They are short-term bonds ranging from three months to one year as opposed to government bonds which have a longer-term to maturity
  • Corporate bonds:
    • Corporate bonds are debt instruments issued by Indian companies when they want to raise funds for their operational requirements
    • When you buy corporate bonds, you are lending money to the company against the repayment of principal and interest as per the agreement
  • Sovereign Gold Bonds (SGBs):
    • SGB is an alternative to investing in physical gold
    • You can invest in these bonds through different authorised partners
    • SGB is issued by the Reserve Bank of India (RBI) on behalf of the government of India so it remains an authentic investment vehicle

What is a bond yield?

Bond yield refers to the amount of money you will make if you invest in a bond. The annual coupon rate divided by the current market price of the bond determines the bond yield. The yield and price of the bond have an inverse relationship. When the bond’s price rises, the yield falls, and when the bond’s price falls, the yield rises.

Picking the right bonds to invest in

The Indian bond market is huge with a variety of instruments available for you to invest in. You can narrow down your investment decision by buying bonds online. Here are a few aspects that you should consider before investing:

  • Consider if your investments are secure
    You need to understand whether the bond is secured or unsecured. If the bond is unsecured, the risk associated with the investment in the bond rises sharply.
  • Consider if you have the capacity to hold an investment for a longer term

Investment in bonds generally requires a longer time frame. So, if you are investing in a stable product like bonds, you should keep the investment intact for a longer period.

  • Consider the ratings
    Another factor to be mindful of is the ratings of the investment vehicle. All bonds are assigned ratings signifying the creditworthiness of the bond issuer.

Bond trading strategies

Your bond portfolio requires continuous involvement, and you can employ different strategies to attain better returns. Let’s look at the top three strategies you can follow when investing in bonds:

  • Passive strategy: It is also known as the buy and hold strategy. Here you are required to choose a higher yield bond with good ratings keeping the same intact till maturity. Bond laddering is one of the most used passive bond strategies, where different investments are made in bonds with different maturity dates to hedge risk against different interest rates.
  • Index matching strategy: This strategy is the semi-passive strategy of investing in bonds. Here you will have to identify a target index and try to rebalance the bond portfolio to achieve index-matching returns on your portfolio.
  • Immunisation bond strategy: This strategy is a mix of both active and passive strategies. Here you will have to identify a target return and the strategy requires you to keep a holistic view of various investment options. Rebalancing of the portfolio will be done as per the requirement to achieve the desired return.

Here is a bonus strategy: Active strategy. This strategy requires you to keep an active approach towards your investments and keep on managing the investments in bonds to achieve the maximum possible returns.

Final thoughts

With the increasing availability of financial knowledge platforms and the ease of investing, you can start investing in bonds as per your financial goals, investment horizon, and risk tolerance. You can choose from the various available bond options and even start buying bonds online. Pick the bond strategy that is right for you and start investing today!

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