What Are Secured Bonds: A Complete Guide To Their Types, Benefits, Risks

Investing in bonds can be a safe option to earn regular income. In India, investors can choose from a wide range of bonds available. Out of them, secured bonds are considered relatively safe as they are backed by assets. This means that if the issuer fails to repay the debt, investors may have the right to claim and liquidate the collateral to recover their investment. That makes them less risky than unsecured bonds, which have no such protection. 

Secured bonds in India are popular among conservative investors looking for steady returns with lower default risk. However, like any investment, they have both pros and cons. 

This blog breaks down what secured bonds are, the types of secured bonds, the pros and cons, and how they can fit into your portfolio.

What Are Secured Bonds?

Secured bonds are backed by tangible or financial assets, which serve as collateral in case the issuer defaults. The issuer can sell these assets in case of financial distress to pay back investors. This feature lowers the risk for investors. As a result, secured bond interest rates are usually lower. However, secured bonds' credit rating is higher due to the guarantee of collateral assets. 

On the other hand, unsecured bonds, or debentures, don’t have any assets backing them. They only depend on the company’s trustworthiness. Since there’s more risk involved, unsecured bonds tend to offer higher returns. 

This makes the difference between secured and unsecured bonds quite evident. Secured bonds are backed by assets, while unsecured bonds rely only on the issuer’s creditworthiness.

Therefore, in secured bonds vs unsecured bonds, investors often choose the first for safety and the second for a comparatively higher return.

Different Types Of Secured Bonds

There are different types of secured bonds in India, and they are all backed by different kinds of collateral. Let us now break down some of the most common ones.

1. Mortgage Bonds

Mortgage bonds are debt securities which are backed by real estate assets or a pool of mortgages. These are typically backed by a pool of home loans, and investors receive returns from the repayments made by borrowers.

Investors receive regular interest payments from the underlying mortgage loans until the debt is paid off. If borrowers default, the real estate collateral can be sold to recover the investment, making mortgage bonds relatively secure. Mortgage bonds are also termed as Mortgage Backed Securities (MBS).

2. Asset-Backed Securities (ABS)

ABS are bonds secured by pools of assets like loans or receivables. These assets generate cash flows used to pay investors. 

ABS are structured in various levels called tranches, which have a differing degree of risk assigned by rating agencies. Higher-rated tranches offer lower risk and returns, while lower-rated ones provide higher potential returns but come with increased risk. 

This structure allows for more personalised investment choices and can boost the credit rating of the secured bond, making it appealing to potential investors.

3. Collateral Trust Bonds

This type of secured bond is issued by a corporation, backed by financial assets like stocks or bonds. 

These assets are placed in a trust managed by a trustee. If the issuer defaults, the trustee can sell these assets to repay bondholders, providing an extra layer of security. 

This structure allows companies to raise funds without pledging physical assets. Thus, collateral trust bonds are typically available for institutional investors and are less common for retail investors.

4. Government Secured Bonds

Government-secured bonds are backed by the Government. Some PSU bonds are backed by specific cash flows or assets, but they are not directly guaranteed by the government unless explicitly stated (like sovereign gold bonds or certain tax-free bonds).

Risks Associated With Secured Bonds

While secured bonds offer the advantages, they are not without risks. Investors should be aware of the following risks of secured bonds:

1. Credit Risk

Even though secured bonds have collateralised assets, the issuer can still fail to pay. Also, if the collateral loses value or is hard to sell, investors may not receive their initial investment back. There can also be instances where an issuer provides false information about the collateral, the bond may not be as safe as expected.

2. Liquidity Risk

Liquidity risk refers to the possibility that an investor may not be able to quickly sell a secured bond without affecting its price. This can be problematic if funds are needed urgently.

To solve this concern of liquidity for secured corporate bonds, Grip Invest has recently launched a new feature on its platform called “Sell Anytime”. With this feature, investors can sell their bond holdings, which they have purchased on Grip Invest, anytime after a two-month holding period. 

3. Market Risk

When interest rates increase, new bonds offer higher returns, making existing bonds with lower rates less attractive. 

As a result, the value of these older bonds decreases. If you need to sell such bonds before they mature, you might incur a loss.

4. Inflation Risk

When inflation rises, the fixed interest payments from secured bonds lose purchasing power. 

If inflation exceeds the bond's interest rate, the actual value of your return decreases. This means that over time, the money you receive buys less than it did when you first invested.

5. Taxation On Secured Bonds

Understanding the tax implications of secured bonds is crucial, as selling a bond can result in capital gains or losses, which are added to the total income of the investor and taxed as per the applicable slab. This can also impact the overall return on investment. 

Despite these risks, secured bonds remain a preferred fixed-income investment for risk-averse investors due to the added security of collateral. The next section of the article will explain the key benefits that an investor gets from investing in secured bonds.

Key Benefits Of Investing In Secured Bonds

1. Lower Risk

Secured bonds are backed by real assets like property or equipment. If the company fails to pay, investors can claim these assets to recover their capital. This makes secured bonds safer than unsecured bonds, which have no asset backing.

2. Predictable Income Stream

Secured bonds pay fixed interest regularly, such as every six months or year. This gives investors a steady income, making them a suitable choice for those who want reliable returns.

3. Portfolio Diversification

Adding secured bonds to your investments helps reduce risk. Since bonds behave differently from stocks, they balance your portfolio and provide stability, even when the stock market is volatile.

Grip Invest offers secured corporate bonds with fixed returns of up to 14%. These bonds are rated by leading credit rating agencies in India such as CRISIL and ICRA, with options including AAA-rated bonds that are considered among the safest bonds in India. Investing in secured corporate bonds helps you diversify your portfolio with non-market-linked opportunities and potentially reduce risk. Click the link below to explore opportunities and register now.

Conclusion

Secured bonds are safer because they are backed by assets, giving investors more security. They offer steady returns but may pay less interest than unsecured bonds. When looking at secured bonds vs unsecured bonds, secured ones reduce risk, while unsecured bonds can give higher returns with higher risks. Before investing, consider your risk level and financial goals. To learn more about bond investing, sign up on Grip Invest today.

Frequently Asked Questions On Secured Bonds

1. Are secured bonds a safe option?

Secured bonds in India are generally considered safer investments as they are backed by collateral, reducing the risk compared to unsecured bonds. 

2. What happens if a secured bond defaults?

If a secured bond defaults, investors can claim the underlying collateral to recover their investment, though recovery may be partial and subject to legal processes. 

3. What is the difference between guaranteed and secured bonds?

Guaranteed bonds are backed by a third party, such as a government or financial institution, ensuring payment, whereas secured bonds are backed by specific assets as collateral.

Want to stay at the top of your finances? 

Join the community of 4 lakh+ investors and learn more about Grip Invest, the latest financial knick-knacks, and shenanigans in the world of investing.

Happy Investing!

Disclaimer - Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading.
This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for consequences of any actions taken based on the information provided. For more details, please visit www.gripinvest.in

Registered Address - 106, II F, New Asiatic Building, H Block, Connaught Place, New Delhi 110001