Want to retire early! Invest in Indian corporate bonds

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Indian corporate bonds are one of the finest options for regular and somewhat safe monthly returns. It is, therefore, must be considered by every individual who desires to retire early. For retired individuals with substantial savings can invest in various investment options. These investments include Annuity schemes, bank deposits, Indian corporate bonds, Equities. Investment in annuities can give you moderate returns only as it does not consider the inflation. so one should add a small portion of his savings in annuities.As far as equities are concerned, it can give you huge returns, however investing in equities require deep research and the risk is huge.

If we talk about bank deposits like FDs, it is the safest form of investment but the return is not so attractive.Let us talk about Indian corporate bonds which not only can fetch you good returns in the form of continuous cash flow every month/quarter/yearly as per your wish but are also safe bet than equities.The interest income or yield you receive from the bond can be a steady source of retirement income.

Why should you consider investing in Indian corporate bonds?

Indian corporate bonds will help you get regular income even after your retirement.Then you should invest in Indian corporate bonds if you have no other source of money and need continuous cash flows.The bond investors can redeem the bond in the market or wait until maturity and receive the principal.

These bonds are offered by financially strong institutions and these are low-risk investments. The only risk is interest rate fluctuation. They can play an important role in your retirement portfolio. Let’s discuss Some of the benefits of bonds.

  •  Income– Bonds pay interest regularly like monthly, semiannually or annually.so they can provide you predictable income from your hard earned savings.
  • Return Higher than FDS – Bonds usually provide higher after-tax income as compared to FDs.However, one should not ignore the risk factor for bonds.
  • Stability– Bonds are stable unlike equity stocks and there is almost less chance that you will lose your money in bonds.
  • Security– Even though Bonds are unsecured, yet investors can check for the credibility of the companies issuing bonds. These companies get rating through various agencies like CRISIL or CARE based on various parameters.

But what exactly is a bond?

Bond is an investment, just like a stock. The difference is that stocks are not loans. So when we buy a bond, we are lending money to the company that issues Tithe Company in return pays interest payments in return for the length of the loan. This interest rate is known as a coupon. When any bond reaches the date of maturity, the issuer of such bond repays the original amount of loan.

For example-If we buy a bond a Rs 1000 Bond with 6% interest rate annually, we will receive Rs 60 in interest during the year (1000*60). Similarly, if the bond pays semiannual coupons or twice a year, we will receive Rs30 every six months.

Various types of Indian corporate bonds

  • Fixed Rate Bonds
  • Floating Rate Bonds
  • Perpetual bonds
  • Zero interest rate bonds
  • Inflation-linked bonds

Are your investments in Indian corporate bonds liquid?

Just like stocks, bonds are also tradable in the market. An investor can sell his holdings in the secondary market like NSE, BSE and gets capital gain in the bond. When someone sells a bond at a price lower than a face value, it is called selling of that bond at a discount. If sold at a price higher than face value, it is called selling of bond at a premium.

Why are Indian corporate bond ratings mandatory?

A bond rating can help you know the creditworthiness of the bond issuer and can reduce the risk of default. The investor, before buying bonds, must take into account the quality of the bond. He shouldn’t tempt for high yield return bonds as high yield could be a poor compensation for the risk. Credit ratings suggest on a scale of high low the probability of default risk. Failure to redeem principal at maturity would constitute a default. Failure to make interest payments on time (that is, to pay coupons to bondholders) would also constitute a default

Bonds are subject to default risk. Bonds issued by entities other than the government, such as corporate bonds, are rated by specialized agencies that specialize in evaluating credit quality. Indian credit rating agencies involve CRISIL, ICRA, CARE etc..  If we talk globally, the big three credit rating agencies are Standard & Poor (S&P), Moody’s and Fitch Group.

What you should look for ratings of Indian corporate bonds

The investors must look for ratings of various bonds which are the efforts of different professional risk assessment agencies. Here are the ratings of bond:-

  • The top rating is – AAA  which represents the highest degree of safety regarding bond repayment.
  • Down to AA- Represents high degree of safety regarding fulfilling the debt obligation
  • Down to BBB represents a moderate degree of safety
  • BB or Ba1 down to C is speculative or too risky.One should be very careful while investing in such bonds.

How you will calculate investment return on bonds

There are two types of returns one can expect from a bond. One is the interest amount in form of coupons, other is the maturity amount which an investor will get only after selling the bond.Let us discuss the Ingredients of a Bond-

  • Coupon Payment- They are fixed amount of interest that an investor receives after prescribed frequency.
  • Maturity Value– It could be a face value or a value more or less than the face value of a bond.
  • Discount Rate– It is a market interest rate or cost of capital of a bond. It derives its rate from a comparable listed bond. The comparison is done with respect to risk and tenure of the bond. For example, if we are valuing a bond which is unlisted and have 5 years of life, then we should look for a bond which is similar in risk profile.( that is same credit rating)

Coupon rate vs Yield

For example, a bond with Rs 1,000 face value and 5% coupon (fixed interest) rate will pay you Rs 50 in interest even if bond price increases to Rs 1500 or Rs 750.It is very important to understand the difference between bond’s coupon interest rate and its yield.Coupon interest rates are fixed, but yields are not.Yield is the effective interest rate which is determined by the relationship between coupon rate and current price.

Yield to maturity

YTM is an annualized rate of return (percent term) one can expect from a bond if held till maturity. So basically it tells an investor that you will get the rate of return if you hold your investments until the maturity.The other name of YTM is market interest rate or internal rate of return of a bond. It actually equates present value of bond’s future cash flows to its current market price.

Current Yield

Current yield refers to annual income divided by the current price of the stock.This yield takes into consideration current price than the face value of the bond. This represents the yield an investor would get if he invests in a bond security and holds it for a year.However, a current yield is not the actual return he receives if he holds the bond up to maturity

Why comparing current yield with YTM is really important?

Current yield is the first yield which quickly let us know the yield in bond.When the bond life is longer (let’s say 20 years), then it behaves like a perpetual bond. that means the current yield would be approx equal to YTM. However, if the bond life is shorter, then YTM and current yield would significantly deviate.Current yield calculations include coupon payments only whereas YTM calculations include coupon payments as well as capital gain. Thus Current yield becomes YTM if the life of bond is huge.

Calculation of YTM

The calculation assumes that the coupon payments will reinvest at the same rate as of bond’s current yield.The formula for calculation of YTM is as follows:-

C/(1+r) + C/(1+r)2…..F/(1+r)n

Here is a list of 4 Indian bonds which may help you retire early

Last few years have been good for those companies which have raised money by issuing non-convertible debentures. These bonds will fetch you high return with the moderate level of risk. Here are the options if you want to invest in Bank Tradeable Listed Bonds with a Tenure of 5 years

10.75% IBDI BANK BOND FV 10LAC (BBB) YTC 10.92%

IDBI Bank had issued unsecured Nonconvertible Basel III compliant Additional Tier bonds ( in the nature of Debentures) of Rs 10 lakhs face value.Post-tax return after 5 years shall be 10.92%.

Suppose you buy 2 bonds of IDBI bank (FV Rs 10 lakhs per bond) with 10.75 coupon rate for 5 years.

The cash flows for these two bonds of Rs 20 lakhs with the coupon rate of 10.75%p.a payable annually

Cash flows Date Amount
1st Coupon 17-10-2018    215,000.00
2nd Coupon 17-10-2019    215,000.00
3rd Coupon 17-10-2020    215,000.00
4th Coupon 17-10-2021    215,000.00
5th Coupon 17-10-2022    215,000.00

 

11.5 %  BOI  BOND FV 10LAC (A+) YTC 9.04%

Bank of India issued Unsecured, non-convertible bonds as Additional Tier 1 Capital in the nature of Debentures (the “Bonds”). This bond pays high-interest coupon 11.5% to the investors and it pays interest on 1st April of every financial year.

Let’s discuss its cash flow with the help of an example. Suppose you buy one bond of Rs 10 lakhs and you will receive interest amount given below

Original Payment Date Modified Payment Date No of Days Amount Payable Per-Bond
Sunday,1st April 2018 Monday,1st April 2018 364                                        114,685.00
Monday,1st April 2019 Tuesday,2nd April 2019 365                                        115,000.00
Wednesday,1st April 2020 Thursday,2nd April 2020 366                                        115,000.00


11% UBI BOND FV 10 LAC (BBB) YTC 10.75%
   

United Bank of India issued Tier I bonds with face value of 10 lac with CRISIL rating BBB. It is paying 11% coupon interest to the investors which are better than the returns from FDs and other securities. Post-tax return on maturity is as good as 10.75%.

8.05% M& M FINANCIAL SERVICES  FV 1000 (AAA)  YTC 7.84%

M&M financial services issued unsecured redeemable non-convertible debentures (NCD) for Face value 1000.This Bond has a high credit rating of AAA by India Ratings and Research Private Limited. Instruments with this rating are considered to have the highest degree of safety regarding timely service of their financial obligations and carry lower credit risk.You can also check the performance of these bonds on NSE website.

In case of any further inquiry, feel free to Contact Certified Advisors

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I have an experience of 19 year and I am deals in Life Insurance , General Insurance, Mediclaim and Home Loan and LAP.

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