Zebu blog

Tag: Capital Preservation

  • The Benefits Of Investing In Corporate Bonds

    Bonds are debt market products that, as their name suggests, pay a fixed interest rate annually or at regular intervals and can be redeemed at the end of a certain time period. Bonds are fixed-income securities that act as a private company’s assurance to raise money for operating costs. Most of these bonds are traded on the secondary market and are also available to investors as “dematerialized” bonds. Before you buy private sector bonds, here are some things to think about.

    1. Is it backed by a reputable business group?

    These corporate bonds from the private sector are at risk of default, but government bonds are not. As an investor, default risk may have two effects on you. First, the company can have bad financial results and be forced to stop making principal repayments and periodic interest payments. Second, even if the bond is traded on the stock market, it could be downgraded by the rating agencies. This would cause the price of the bond to drop.

    2. Don’t try to find more ways to make money

    Going down the grading curve to find higher yields on private bonds is very common, even among fund managers. For instance, a corporate bond with a AAA rating will have the lowest interest rate. But if you choose bonds with an AA or A rating, the yield will be higher because these companies are more likely to pay higher rates than AAA companies. Even though not every AA or A-rated company will go bankrupt, it is a risk, so you should be careful. If you can’t sell the bond on the secondary market or don’t have time to keep an eye on how the company is doing, the risk is higher.

    3. Keep in mind that private-sector bonds make you pay more in taxes

    Your actual returns depend on how the tax treatment works out in the end. When you buy private bonds, the interest you earn is taxed at your highest rate, say 30%. So, if the bond pays you an interest rate of 11%, your real yield after taxes is only 8.7%. (11-3.3). Even though the lock-in term may be longer, it may be better to invest in an infrastructure bond that saves taxes. For example, if the interest rate on a tax-free bond for infrastructure is 6.5%, the effective after-tax yield will be 9.3% (6.5/0.7). In reality, an infrastructure bond has a higher effective yield and a much lower risk of default.

    4. You might find that investing in debt funds is a better idea

    If you want stability, debt funds may be a much better option for you. Debt funds let you benefit from both the interest on bonds and the growth of your capital when interest rates go down. The second benefit of debt funds is that they build a portfolio of different types of debt instruments with different levels of risk. This makes your overall exposure risk much lower. It’s hard to come up with this much variety on your own. Third, unlike bonds, which are usually hard to sell quickly, debt funds are easy to buy back. Price anomalies can also make it so that the prices don’t reflect the bond’s true value. Last but not least, debt funds are much better than private sector bonds when it comes to taxes. If you choose a debt fund’s dividend plan, you can take out the profits without having to pay taxes because dividends from debt funds are tax-free in the hands of the investor.

    The yield on private sector bonds is a little bit higher than that on bank FDs, but the risks are also a little bit higher. Before putting money into private sector debt, you should know this.

  • Are Tax-Free Bonds Right For You?

    In the past few years, investors with a lot of money have been more interested in tax-free bonds. Large infrastructure players can raise money at the end of the fiscal year by selling tax-free bonds. By offering these tax-free bonds, the government can help pay for infrastructure. There are two main types of bonds that don’t have to pay taxes. Let’s try to understand them better.

    First, there are Section 54EC bonds. If you buy them with the money you made from a sale, you can get a tax break. Because of the benefit in Section 54EC, you won’t have to pay tax on your capital gains. The interest that investors get from Section 54EC bonds will be fully taxed in their hands. Second, there are bonds that the investor doesn’t have to pay any taxes on. This means that interest is paid on them regularly. If you are in the 30% tax bracket, a 6% tax-free bond will give you an effective yield before taxes of 8.57 %.

    Does it make sense to buy Section 54EC bonds?

    HNIs seem to want these bonds a lot because they see it as a good way to lower their capital gains tax. But there are a few important things you should remember about buying these bonds. To make up for the tax benefit, the returns on these bonds are much lower than on regular bonds and bank FDs. So, it only makes sense if you really have capital gains that you need to pay less tax on. Second, to get a tax credit under Section 54EC, you must invest the whole amount, not just the capital gains. There is a cost to that in the form of missed chances to invest in other things. So, unless capital gains make up a big part of your total sales profits, these bonds aren’t very helpful.

    Taking into account the indexing benefits of long-term holding might be a better way to figure out how much capital gains tax you have to pay. If, after accounting for indexing, your total tax bill is less than 10% of your income, it makes sense to pay down the tax and put the rest of the money into investments that will make you more money. You can also use Section 54 to your advantage if you use the money to buy another property. Taking into account the lock-in period and the opportunity cost of investing the whole return, the tax savings bond may not be worth much to investors.

    Are bonds that don’t get taxed a good choice for investors?

    As was already said, these tax-free bonds involve investing in a business that focuses on infrastructure and will allow you to get interest without having to pay taxes on it. When taxation is taken into account, the effective returns are at first higher than those of taxable bonds. During the lock-in period, however, your bonds are pretty much just sitting in your demat account. This can be quite discouraging. Since this asset doesn’t really make money over time, the key question is whether or not the lock-in period is worth it. The bond’s value hasn’t changed much, so it would be better to stick with traditional bonds and fixed deposits (FDs), which don’t have lock-in periods and can be quickly and easily turned into cash.

    Why not think about debt funds as a better option?

    Through debt, you should be able to meet your basic needs for security and guaranteed profits. Choose debt funds if you want to make the best choice. First, you won’t have to pay taxes on the dividends you decide to get. Second, debt funds are easy to cash out because they are liquid and can be sold in less than two days. Third, investors worry about interest rates and the chance of a default. The risk of interest rates will be looked at separately, but the risk of default can be cut down by focusing on risk-free G-Sec funds. Now, let’s talk about the risks that come with interest rates. In the current economic situation, rates have stayed low, which means that they should help with debt funds. When market rates go down, the NAV of debt funds goes up, so investors can make money from both interest and capital gains. Even bonds that don’t have to pay taxes don’t help in this way.

    In the end, it’s easy to get sucked in by how appealing tax-saving bonds seem, but you need to do the math right. Before you decide whether or not to buy these tax-free bonds, look at what else you can do.

  • When Should You Move To Debt Funds?

    In October 2021, the NIFTY reached its all-time high. The price of stocks was going up. Because of easy monetary policy, low interest rates, and FPI, the world stock market reached all-time highs. Some mutual funds, such as SBI Small Cap and Union Small Cap, had 100% returns.

    How should you invest when the market is very unstable and the NIFTY has dropped more than 25%? Do you have to put all of your money into debt funds?

    What are debt funds?
    Debt funds are types of mutual funds in which the money is invested in different debt securities. The debt funds also buy government and corporate bonds.

    Companies put out debt instruments in order to get money from the market. So, lending is the same as putting money into debt funds. The main reason to invest in debt funds is to get a steady stream of income. The issuers give returns based on a fixed interest rate that everyone agrees on. Because of this, debt instruments are sometimes called “fixed income securities.”

    When your portfolio is losing money is not the best time to invest in debt funds. Instead, the best time is when the stock market is hitting new highs. You can lock in your earnings by putting the money in safe, low-risk debt funds.

    When the interest rate is going up is yet another case. Since the interest rate goes up when the stock market goes down, and vice versa, this often happens when there is a lot of chaos in the stock market.

    It shows the way things are right now in the economy. The market is in a very bad place right now, and NIFTY has lost a lot of its value. In order to stop inflation from getting worse, governments are tightening their monetary policies. One way they are doing this is by raising bank interest rates. Because FD interest rates are going up right now, you might decide to put some of your money into debt funds.

    If you want to invest for the short term, you should invest in debt mutual funds to reduce risk. For short-term capital needs, you might want to think about liquid, ultra-short, low duration, and money market funds. These funds are given out over a six- to twelve-month period.

    Debt funds have low-risk returns and may be good for certain types of investors. There are many different ways to put money into debt mutual funds.

    Bond funds that are managed dynamically move money as interest rates change, which is what the name suggests.

    Income funds are safer than dynamic funds because the fund manager will invest in long-term funds.

    A very short-term fund’s life span is between one and three years. With a short-term investment goal, ultra short-term funds offer stable returns and a lot of cash.

    Conclusion
    If you were thinking of sending money to a debt fund, you should think again! You should buy more stocks when the market is unstable and going down. Debt mutual funds may make your portfolio less risky, but they also make it less likely that it will make money. Debt funds, or FDs, are good investments for short-term investments or for people who are retired and depend on income from investments.