There is a lot of interest in “high-interest bonds”. Unless you need a regular income (because you are retired or on a break, etc.), you don’t need bonds.
Even if you need a regular income, it is important to exercise extreme caution before buying non-central government/RBI bonds. A bond typically pays out interest once or twice a year.
The lower the credit rating, the higher the interest rate. Which makes sense from one point of view and not from another. A financially unhealthy company must pay more interest to anyone who wishes to fund it (i.e., provide a risk premium to the lender). But then again, how will an entity already in trouble ensure payment of high interest?!
This is why I recommend avoiding all bonds issued by entities other than the central government or the RBI.
What about state government bonds? These typically have higher interest rates and a low default risk, but there is always a risk of interest payment delays.
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What about AAA-rated bonds? When they are part of a mutual fund, the risk is significantly lower. When you buy them on your own, the concentration risk increases significantly. An AAA rating is only an opinion and not a guarantee of interest and principal repayment. These opinions can change overnight.
So what should investors do?
If you want a guaranteed regular income, buy bonds via RBI Retail Direct. Avoid any other private portal. See our discussions earlier.
- RBI Retail Direct Bonds vs RBI Floating Rate Bonds
- Life Insurance Pension Plan vs RBI Retail Direct Bond: Which is better?
- How I used RBI Retail Direct to buy govt. bonds and create an income source
- RBI Retail Direct for govt bonds: Who should use it and who should not
- RBI Retail Direct: A look inside: how to register and what you can buy/sell
If you do not want a regular income, you can choose debt mutual funds. You can consult Plumbline: Our free handpicked list of mutual funds for recommendations. However, you must be aware of the risks of investing in a debt mutual fund. They are not a replacement for (safe) bank FDs. But then again, neither are high-interest-rate bonds.
For short-term goals of less than 5 years, stick to safe bank FDs and RDs (safe here means too-big-to-fail banks like SBI, ICICI, and HDFC, which the government would bail out).
For 5-7 year goals, use short-term debt mutual funds with high-quality bonds. For longer-term goals, use medium-term debt funds, such as high-quality bonds.
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