This intrument gives more returns when intetest rate falls! Check it out!!

 




What is worse than hair fall? Interest rate fall! Jokes apart, the continuous fall of Bank Interest rates now a days is a big concern for everyone especially for the senior citizens who keep most of their money in the Fixed deposits and runs monthly expenses from the interest income.

So is there any way out? Yes! Because Fixed Deposit may give less return with the falling interest rates but there are other instruments which ride on the back of the tide. Investing in them may give better returns at the time of falling interest rate scenario. One of them is Bonds.

Bond is a financial instrument which is issued by Government, Banks, Financial institutions or Companies. This have a fixed maturity and it is issued at a fixed price or face value and pays interest at a certain rate (i.e.: Coupon Rate) throughout its tenure annually/Half Yearly/ Quarterly just like Fixed Deposits.

Let me give an example. A company is issuing a  8.5% Annually 10 year Bond with face value of 1000 Rupees means, someone can purchase the bond by rupees 1000 and he/she will get 85 Rupees annually up to 10th year and after 10 years he/she will get 1000 Rupees Back. So his income is (85*10) = 850 Rupees by investing 1000 Rupees.

This is the fundamentals of Bonds. But how is it related to interest rate movements? Apart from the initial issue from the companies or Government, Bonds are also sold in the secondary market or in an exchange. This is where the game is. In the secondary market, Bond’s market price varies inversely with the interest rate. Because when interest rate falls, the earlier bonds giving more interest rates become more valuable and their price increase. Similarly when the interest rate increases, the price of the Bond decreases.

Suppose someone bought a Bond at a price 946 Rupees which gives a return of 8%. Now when interest rate falls to 6%, the price of the Bond goes up to let say 1500 Rupees. So now if he/she sells it, he/she will get a gain of 554 Rupees. So using the falling interest rate one can gain a lot.

So now it comes to the final question. Where can someone buy bonds? There are several ways. Most popular is by having a Demat account and buying from the Stock Exchange or by investing in mutual funds (Debt Funds). 

Coming to the conclusion, when the interest rate is rising, invest in the Fixed Deposits or Equities and when it is going down buy Bonds. You will gain both ways.

Happy Investing.








© Deep


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