Is It The Right Time To Invest In Bonds In 2023?

People in India still have the mindset to invest in Fixed Deposits as they provide them with safety, comfort, and fixed returns. Bank Fixed Deposits provide 5-7% returns, sometimes insufficient to match the inflation rate. On the other hand, equity offers higher returns, but people find the stock market risky because of market volatility and lack of knowledge.

Corporate Bonds provide a middle path and a bridge between the two, being safe and providing better returns than bank Fixed Deposits. In this blog, we will explore the current trends in the Indian bond market.

What Are Bonds?

Bonds are financial debt instruments issued by private or public corporations to raise funds from the public. When you invest in a bond, you provide a loan to the issuer. In exchange, the issuer pays a pre-determined interest and principal amount on maturity, thus providing a stable source of income. 

India’s corporate sector requires funding and banks’ funding may not be enough to fund the company’s financial requirements, resulting in companies issuing corporate bonds.

Bond Market Trends

The debt market has become an attractive investment option as we are near the end of a rate hike, and the yields are significantly higher.  Higher returns in the bond market are yielded when the investments are made near the peak of the rate cycle.

Now that we have explored the bond market trends, it is important to understand how the bond market trends impact bond investors and their investment decisions. 

RBI Keeps Repo Rate Unchanged: What Does It Mean For The Bond Investors? 

Repo rates refer to the rate at which the Central Bank lends money to Commercial Banks. It is considered a standard for determining interest rates in the country. RBI has kept the repo rate unchanged at 6.5% during the August 2023 monetary policy, which, if changed, would have impacted bond investors.

An unchanged repo rate means stability in the interest rate for bond investors indicating that the Central Bank is confident of the country's overall financial health and inflation levels, which may positively affect the investors' sentiments.

However, it is essential to consider other factors apart from the repo rate while investing in bonds, such as expected inflation, credit ratings, and fiscal policies that may influence bond yields and prices. 

Why 2023 Is A Good Time To Invest In Corporate Bonds? 

1. Economic Revival: After the damages done by the COVID-19 pandemic, the economy has begun to bounce back to its normal levels. It is expected that the Reserve Bank of India (RBI) will normalise the policies for economic growth and keep the rates stable in the coming years.
2. Future Growth In The Bond Market: CRISIL is a globally renowned credit rating agency that has predicted that the supply of Corporate Bonds in India is expected to be doubled to INR 65-70 lakh crore by fiscal year 2025, which is a good sign to invest in Corporate Bonds¹. 

Things To Keep In Mind While Investing In Bonds

• Secured Or Unsecured: Secured Bonds have collateral, which means investors' money is secured, while Unsecured Bonds do not have such security, but they provide investors with higher returns. This helps you consider your risk appetite while investing. 
• Coupon Rates: There could be minor differences in the interest rates pertaining to different bonds. As a prudent investor, you should always check that the coupon rate on the bond you plan to invest in is not significantly off the market rates. Bonds with coupon rates lower than the market tend to trade at a discount. 
• Credibility: Checking the credit rating of the bond is one of the essential things before investing. AAA bonds are known as the safest bonds and have the lowest chance of default but provide a lower yield. Bonds that have lower ratings provide a higher return but are riskier.
• Exit Options: You must know your liquidity requirement before investing in Corporate Bonds. Your investment horizon and the bond's maturity period should match as premature selling of bonds may result in lower returns. For instance, when the interest rates hike, new bonds offer more lucrative returns than the current ones. If you decide to exit from your investment in such a scenario, you may have to sell your investment at a lower price to compensate the buyer for your bond's lower interest rate. 
• Investment Goals: Knowing your investment goals helps you better understand your finances. You may be looking for regular income from bonds or capital appreciation. Depending on your investment goals, there are various bond options available. 

Conclusion 

Considering the current market conditions and factors, including the end of a rate hike and higher yields, 2023 presents a promising investment opportunity in bonds. The RBI’s decision to keep the repo rate unchanged signifies stability and confidence in the country’s financial health. Corporate Bonds have been a stable fixed-income investment option with a safety net. Knowing your risk appetite and investment goal helps you select the right bond. 

It is advisable to know your investment goals before investing. Conducting research and understanding the risk-reward dynamics is vital before you invest your money. 

You can also explore various curated investment opportunities in Corporate Bonds from Grip. 

References:

1. CRISIL <https://www.crisil.com/en/home/newsroom/press-releases/2021/02/indian-corporate-bond-market-can-double-by-2025.html>

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