I just wanted to share this opportunity in GOI 10yrs BOND with you.
I feel that the top main reason for any of you to invest in GOI BONDs should be as follows.
If you want to get better rate than FD and not take risk this is the right opportunity for you.( I will explain you what do I mean by not taking RISK later in this topic)
According to me this investment of yours is going to be for 2 or max 3 yrs so if you are new to markets and you don’t want to right away invest you money but still want decent returns while you are understanding markets then you can go for it.
If you plan to invest your entire funds in stock market and take it up as your career than I fell you will need a regular source of income. So instead of investing in dividend giving companies you can put your money here.
I feel the above given reasons are the top main reason for you to invest in GOI bonds.
According to me the risk of loosing your initial capital here is very low. You will only loose your initial capital here if government defaults to pay back the bond amount which is going to happen if India goes into WAR or we have a deep financial crisis like SRILANKA. .
I would like to share some terminologies and working of BOND market.
Bonds are always seen with the base of 100.
eg: government issues 5000 Rs bonds. So you compare all the values with 100 and then multiply it by 50 to reach 5000.
Coupon rate is the rate at which government issues the bonds.
eg: government issues these 5000 Rs bonds with the interest rate of 6.8% per annum.
Since the bonds are also traded in secondary market the price of bonds keeps going up and down. Now suppose the bonds are trading at 95 Rs( remember the base is always 100 you can multiply it with 50) and you buy it. You are going to receive the same interest 6.8% which is 6.8 Rs but since you purchase the bond at 95 for you the interest is 7.5% This is known as yield.
Yield is the rate of interest you will receive on you invested capital.
Maturity is when the period of bond ends and you get your principle capital.
Now on maturity let say after 5yrs you get your 100rs back. what is you simple interest for these 5 yrs. It is not 7.15% it going to be 8.15% . Why because you purchased the bond at 95 but government had raised 100 so they will return you 100 regardless of the price in secondary market. This is known as yield to maturity.
Currently a 10 year government bond is trading at a yield of 7.3%. The par value is 100 Rs with a coupon rate of 6.8% and the value of the bond in secondary market 94.5rs so the yield comes out to be 7.3%
The bond prices are low because of high inflation resulting to high yield. Now the yield are going to come done ( also means bond price are going to go up ) as the inflation starts stabilizing. I feel after the June rate hike slowly the inflation will start going down or stabilize it might even take more time. But over the next 2yrs inflation has to go down unless there is another war or some uncertain event which has a global impact.
So if you buy the bond at 94.5rs this price is bound to go back 100 in next 2yrs or it can even be faster.
So if you take your interest of 6.8*2 Rs for 2 yrs and then sell the bond at 100 making a capital gain of 5.5rs you end up making 19.1rs on 94.5rs which comes out to be 20% in 2yrs with extremally low risk because it is government bond.
Now what if china attacks on Taiwan, we never know. The inflation will further go up and the bond prices will further go down lets say it goes to 90rs. In this situation one of the major drawback is that you will have to wait till maturity and your money get blocked and you return also goes down to 7.5% to 8%.
Now I want you to calculate the probability of this situation and invest accordingly. But if you see the good side even in this situation you are getting 7.5% .
So people who are happy with 20% in next 2 yrs without much risk this is a good opportunity for you. Now it might not be exactly 20% but it is definitely going to be above 15%.
Let me tell you the cons of bonds.
1 If the interest rates goes down which I am hoping and the bond prices rise the markets are also going to go up. So you might feel bad for making less money here when markets could have rewarded you more. So if you are full time into markets then I would suggest you to not invest your money here but if you are not then this is a good opportunity for you.
2 If the bond prices go further down over a long period lets say 2yrs which I feel has very less chance your money gets block because you would not want to sell it at loss and will have to wait till maturity.
I would also like to give an advice here. If you are buying bonds try buying the bonds which give interest half yearly and not yearly.
Overall it is a good opportunity but I am not going to put money here because I feel I can make more money via equities but if you don’t want to risk your money and still want decent returns go for it.