Couple of weeks I did an article on Fixed Income Investments in Indian Market. And provided some caveat. Before getting back to the Indian bond market let’s try to see the key components of Fixed Income securities, It’s the Credit quality, yield, and maturity are key components of fixed-income securities.
Well Credit quality is an indicator of the ability of the issuer of the fixed income security to pay back his obligation. The credit quality of fixed-income securities is usually assessed by independent rating agencies such as Standard & Poor’s, Moody’s in the U.S. and CRISIL in India. Most large financial institutions also have their own internal rating systems.
Yield on a security is the implied interest offered by a security over its life, given its current market price.
Maturity indicates the life of the security i.e. the time over which interest flows will occur.
Here are some great points to share about bonds as investments or income sources is simple :
1. Ladder: Owning individual bonds in a ladder (no longer than 7 years) is much preferred to bond funds. If and when rates go up, you get to replace the specific holdings with higher yielding issues (note that if this happens, inflation is likely higher)
2. Independent Credit Risk Analysis: Work with Bond managers who do their own due diligence and have a deep research division. Do not work with managers that relies on Moodys or S&P for credit ratings. These firms are worthless money-losers who sold out investors to iBanks the last crisis. They should have been put down like rabid dogs. If you invest based on their “analysis” you will deservedly lose money.
4. Income/Yield: You can create a yield/income portfolio, but only if you understand there is more risk involved and are willing to accept the loss of principle.
5. Bond Funds Have Different Risks than Bonds If you buy a quality bond, and hold it to maturity, you will get your money back. Sure, a treasury can move up and down but held to maturity it will pay back its investment. Not so with all bond funds. If markets go topsy-turvy and a bond fund faces redemptions, they sell what they can, sometimes at a loss. Hence, it’s another risk factor versus bonds or bond ETFs.
Have a graceful Sunday.