@Leisure - Vol-8 | srei

@Leisure - Vol-8

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Bonds versus Debentures: Is there a Difference?

To a new investor, the terms used in financial markets can be really confusing. One such common confusion is caused by the terms “bonds” and “debentures”. People often wonder if these words mean the same kind of debt security.

At a practical level, bonds and debentures are largely the same. In India, as per market practices, debt securities issued by private sector companies are called debentures, while those issued by public sector companies are called bonds. Government borrowings using debt instruments are also known as bond issues. A popular example of a government bond is the 10-year government securities (called 10-year G'sec), which is an indicator of interest rates in the markets.

Understanding the features of these two instruments can give you some insights into them:

  • Fixed Repayment: Both bonds and debentures are debt securities. Both offer a fixed amount of interest on their face value and have a fixed repayment period.
  • Security: Bonds and debentures could be secured or unsecured. Security offered is usually assets of the issuer. In case of a secured bond or debenture, if the borrower defaults, the security is sold and investors are repaid.
  • Maturity period: Normally debentures could be for any period ranging from 18 months to 7 years while bonds could be for periods ranging from a year to 20 years. The period will be decided by the borrower depending on how long the funds are needed for.

To conclude, whether you invest in a bond or a debenture, what you need to check is whether you are comfortable with your investment in terms of the risk in the investment, the expected return, the investment period and how quickly you can sell if you want to exit the investment. Like the wise poet William Shakespeare said, “What's in a name? That which we call a rose by any other name would smell as sweet.”

 
 

How interest rate movements impact the value of your NCD

Non-convertible debentures (NCDs) are financial instruments which can be classified under debt investments. NCDs are either secured or unsecured. The company’s assets back secured non-convertible debentures while unsecured debentures don’t provide any collateral cover whatsoever. Just like any other investment, NCDs are also affected by a myriad of external factors. In the case of NCDs, interest rates play an important role. There is an inverse relationship between interest rates and price of NCDs. With increase in interest rates, price of NCDs will fall and vice versa. Let's understand why this happens.

NCDs are traded in the secondary markets; this means that they can be bought or sold on the market even after they have been issued and before they mature. Interest rate changes are reflected in the price of NCDs on the secondary market.

Interest rates go up and down from time to time. When the interest rates are high, newer issues of NCDs often hit the market with higher yields. This increases the appeal for newer issues but affects the demand in the secondary market for earlier issues. When interest rates are lower, newer issues usually come to the market with lower yields, thus increasing the appeal for earlier issues in the secondary market. It is best to look at the interest rate environment before making decisions regarding sale and purchase of NCDs.

Srei Infrastructure Finance Ltd. has consistently earned higher ratings from various prominent agencies and offers various choices in NCDs. The company’s focus in priority sectors like infrastructure lending with interests in equipment finance and project advisory, and over 24 years’ of experience, give its offering high credibility.

 
 

Bonds help you manage volatility

Ups and downs in values of investments are always an investor’s nightmare. Some investors may even keep totally off investments that witness fluctuating returns or prices, which is generally called volatility in investment language. Yes, it is true that watching your investment value or gains fall is not such a pleasant experience after all. But isn’t there a way out to reduce this unpleasantness? Read on.

Investments whose price or value depends on the prevailing market price are termed as market linked investments. Volatility is an integral part of any market linked investment and it cannot be wished away. Besides, it’s important to invest in such market linked investments to protect yourself from inflation. Such investments tend to deliver higher returns to investors over time to compensate for the higher risk.

You can however soften this volatility by adding some stable, fixed return bond investments to your portfolio. Since these bonds have minimum volatility, they ensure that the investment portfolio is reasonably stable even in turbulent times. When some bonds are added to the volatile investment portfolio, the fluctuations are controlled to a great extent. And when volatile investments are struggling with poor performance, bonds usually do well since interest rates tend to fall in such periods (leading to rise in bond prices).

To conclude, bonds are an excellent option to bring down the overall volatility of investments. They smoothen the investment performance perceptibly thus giving lesser anxiety and better investment experience to investors. It can therefore be safely said that bonds add value to the portfolio in more than one way.

 
 

Buddy Jokes

1. During an interview, a journalist asked the MD of a growing company, “Sir, how many employees work at your company?” He replied “Approximately half of them.”

2. In our economy, the farmer is the only person who buys everything at retail prices, sells everything at wholesale prices and still pays the freight both ways.

3. Mr Sharma, who had an electronics store on Mart Street, was dismayed when a brand new electronics store opened up in the shop on his left, with a huge sign that said 'BEST DEALS.'
Few days later, another electronics store opened up on his right with an even larger sign that read 'LOWEST PRICES.'
Mr Sharma was worried about his business until he got an idea. He put up the biggest sign above his own shop 'MAIN ENTRANCE'