The Indian bond market now has many options but should you buy one?

Published: December 22, 2022 at 6:00 am

The Indian bond market is exploding with options. If you search on Google for “buy bonds in India”, the first hits and the last three hits are ads by bond portals! Then we have portals that exclusively sell via influencer networks and content marketing.

These bond portals have different offerings, from gilts to corporate bonds to covered bonds (refinanced debt) to peer-to-peer lending. For a simple explanation of covered bonds, see: Is there a place for high-interest rate fixed income products in a portfolio?

The offers from these portals go, “buy 9%, 10%, 12% …. bonds”. Then they claim such bonds are safe, they have done the research to protect investors. The feedback from “investors” claim that these bonds are safer than stocks and more rewarding than bank FDs.

But are such bonds (other than those offered by GOI  or RBI) safe? The short answer is no. In the bond market, the risk premium is measured against sovereign bonds. Government bonds have a sovereign guarantee. Unless the country is in serious trouble, the currency is in deep trouble, or the government is bankrupt, such bonds are “safe”.

Any other bond, including state development loans, is never as safe. A bond offers a higher interest because its repaying ability is lower than that of the central government. This is ironic as we demand more interest from an already troubled entity.


🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)
 
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!

In the case of state government loans, there is considerable borrowing from the central government, so defaults are rare, if not unlikely. However,  in principle, interest payment can be delayed if state finances are in a crunch.

But my loan is secured with collateral. Is this not safe? No, it is not! Collateral is almost always an illiquid asset. So selling it will take time, even if we assume no other legal barriers exist. So if the borrower with collateral defaults, you will get your money back “after some time” – when no one can say. Delay = loss because time is money! Also see: Delay in EPF interest payment: Is there a loss to subscribers?

Here are some thumb rules for buying or avoiding bonds!

  • Never buy any bond when you are far away from retirement or when there is no need for income. Bonds pay out interest once or twice a year; these are taxable per slab. Instead, use debt mutual funds. For long term goals, along with equity or equity mutual funds, a debt mutual fund can lower overall risk via regular rebalancing. The lower tax incidence is an added benefit.
  • Never buy any bond (or any product, for that matter) by looking at the claims made by influencers or on the product website. All such statements are embellishments.
  • If you do not have the patience to read through and appreciate the terms and conditions document (the one that is usually hard to find), never buy any product.

If you chase after high returns without research, you are guaranteed high risks with returns entrusted to luck. Bonds carry hidden default risks. Everything will look rosy and posy when suddenly a default is declared. So we recommend staying swaying from such rosy bond offers.

Those who appreciate diversification, goal-based investing, and portfolio management can afford a small exposure to such bonds if they have an investment strategy. From our experience, most people who want to invest in such bonds have nothing more than a desire to earn high returns to back their eagerness. Then again, small exposures have a small, if not insignificant, impact. This is more to satiate FOMO rather can create any impactful wealth.

Even a well-diversified and well-managed gilt mutual fund that takes no credit risk or a target maturity fund investing only in government debt is largely unsuitable to the typical, lazy investor who wants returns without research, such bonds are a big no-no.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)
 
Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
  Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)