What are BONDS & how to invest in them?

we invest money in equity Mutual fund But then we purchase shares too But whenever we invest in debt Mutual funds. then Why don't we think it? We even don't know that how to purchase bonds directly The answer is very simple CREDIT RiSK. If you brought a 1000 RS share Either it will go up or it will go down But if you gave 1000 RS loan to a person and he default it Then leave about interest. Your 1000 would become 0 even And that's why till today.

we don't know that If we have to invest directly in bonds then how to do it and what if I told you, this credit risk is in many bonds But in some bonds, it's 0 and in some bonds, it's very low but we never think in that direction and the thing which is lacking in knowledge and how I will let it happen afterall we all are JAGRUK JANTA So let's understand how you can invest in bonds So that you can get a fixed income.

It might be you have a corpus amount and didn't where to invest it And this could be a solution and how to minimize your credit risk. And 2 big bonus tips Not one, there will be 2 First of all the most obvious question Why should you even consider to invest in bonds directly It's one answer could be you wanna diversify your portfolio But you will ask portfolio could also be diversified in debt Mutual fund The answer is in debt Mutual fund.

you have to give the expense ratio It's not that bad, but there are more qualified people than you Who is managing money but, These are the 2 reasons 3rd reason maybe Which is quite obvious. You have good capital and you don't want to take much risk on that And using that capital you want to generate a fixed income So this could be a great option.

How can you invest in bonds directly?

There are 2 ways

1st is the primary market: Like how IPO

2nd method to invest in bonds is Is Secondary market

1st is the primary market Like how IPO is launched likewise bond's fresh issue is also issued and you can subscribe to it Or your broker could provide this service Or you could Directly go on company's website to apply Or you can also apply through your bank even But you do need a Demat account from now physical is not working but you do need a Demat account from now the physical certificate is not coming Everything is stored in the Demat account You don't have a demat account till now? Then open it, link in description And you can also become a partner of jagruk investers community All details are in the description.

2nd method to invest in bonds is Is Secondary market

if now I buy reliance shares through my Demat account I won't buy it from the company itself there will be a shareholder for it And my Order will match with him that means I will buy shares from him Similarly, bonds get also listed after being issued Some bonds don't get list but now let's focus on listed bonds If the bond is listed on the stock exchange then I will use my Demat account Search that bond through its code and could buy it from there directly It has 2 problems 1st searching is very difficulty Because you should be knowing that code, somehow you get it from google But in Demat account the bond details won't be shown Except for the price, and in that price there are too many components For example, its face value, Accrued interest on it,

what's its YTM: yield to maturity

If you don't know all terms then don't worry I am going to explain But the problem is it's not very convenient to buy a bond from the secondary market using your Demat account. One more problem is of liquidity if I wish I can buy reliance share in a snap but I can't buy bonds from secondary the market even with my willingness to buy neither I could sell it.

so that's why buying a bond is not at all innovative So that's why no one knows how to invest in bonds Because if it is that, that much simple then everyone will be doing it but there is one way through which you can invest in bonds And at least at the time of investment liquidity will definitely happen That means the bond which will be flashed on your screen.

You can invest in it and on same the day you can take its delivery The sponsor of this video is the fixedincome.com I like their model and they are solving some genuine problems but first this first, credibility why trust in newcomers The fixedincome.com is promoted by tip sons group which is a SEBI Registered entity You can easily verify them on going on SEBI's website but the most important thing is since they are a debt broker but not an exchange so they are not maintaining your account which is why.

You invest in any bonds that won't get stored at fixedincome.com they Directly get stored in your broker's account (at CDSL or NSDL) And the coupon rate on the bond i.e. interest payment is directly paid to the bond holder by the bond issuer that means if I used fixedincome.com and let say I invested in SBI bond the interest on that bond SBI will directly send into my account in that case ZERODHA UPSTOX doesn't have any role and if fixedincome.com doesn't have any role.

So they don't charge you Your transaction charges and account maintenance charge is also 0 And moreover your account the opening fee is also 0 So how do they earn? Since this company is not an exchange So how they are giving facility to invest in bonds The one and only one reason is they are maintaining a stock of bonds means.

They already have too many bonds in their stocks, purchased from the market because if you are willing to invest in them So, they will give you bonds from there stack of stock which explains the high liquidity whichever bond you are able to see on their portal You can take it the same day after payment and take delivery. This will definitely reflect in your Demat account.

Because here no order is matching, as if you are purchasing some stuff from the shopkeeper. And shopkeeper earns profit on that stuff What's their profit margin? and that will decide your cost price. it's per 5 paisa / 10 paisa per hundred rupees. Before I tell you the process lets understand the types of bonds. 1 st type of bond is government bond here your credit risk is 0. Because government is the biggest borrower of our country. and never default Whenever there is a lack of money to the government. They issue new bonds to RBI.

And hence raise money. In other words, print the money. oo now we will say the government bonds in other words as G-Sec. i.e government securities 2nd type of bond is a corporate bond. where are the highest risk of defaults. And you and I both know that. AAA rating companies can also default. 3rd is a PSU bond here your credit is almost negligible. Because these companies are owned by the government of India for example rural electrification corporation. And power finance corporation this all is PSU.

Here credit risk is almost 0. But they have 3 types of bonds. 1. PSU taxable bond which is a normal bond. Your investment in bonds will be defined as your income. You have to pay tax on it. PSU tax-free bond, in this all your earnings over interest are tax-free. 3rd- Under Section 54EC If you sold your land, building or say house property. Whether residential or non-residential. And after selling it, any profit beneath 50lakhs you have invested in any PSU bond.

Then you don't have to give any tax as you have invested in 54EC bond Because you have invested your whole money in PSU bond. however, after investing in that PSU bond. Whatever is the rate of interest you have to give tax on that. Now what is this yield, it's totally different from the coupon rate. For example on some bond the coupon rate is 9%.

That doesn't mean that you till get 9% returns on that. That depends upon the price of the bond. Or at which price it's being sold or redeemed. Suppose, I am a company and issued bonds. and want to grab the money for the loan from the market. Let the face value of one born by 1000 rupees. And its coupon rate is 9%. That means if I took a 1000RS loan from you. Then I will give you interest according to 9%. But in the future, I wanna gain money from issuing bonds.

But this time the coupon rate is 7%. I am not in a capacity to give 9% interest, that means the existing bonds of 9%. Which have been held by you. Suddenly too many peoples will be willing to buy the bonds. The bond having 1000 rupees face value. Might become 1050 rupees or 1100 rupees, by selling to others. Because the value of your bonds is more. But now that new person, is purchasing bonds from you in 1100 RS. You're giving interest according to 9% but, the interest amount given to that person won't be 9%. Interest WILL be less than 9% i.e. he will get 8.1% interest.

After all the money borrowed by the company is only 1000RS. The company will pay interest according to that much amount only. It's not the fault of the company if the price of bond increases or decreases in the future. This can go either way let's take an example. let's say you purchase a bond at 1 lakh rupees face value. Having 12 months maturity. and you redeemed it after its maturity. That means your selling price is also 1 lakh rupees.

This is not actually the selling price, the company has given you your money back. and the coupon rate is 10% As you didn't sell the bond in secondary market to someone else. On increased price or decreased price. So your capital gain is zero because you bought and sold it for 1 lakh rupees only. That moment for 12 months. sold on the basis of 10%.

You will gain an amount of 10000 rupees and your total profit will become 10000 rupees. Your total investment was of one lakh rupees. That means your annual returns come out to be 10%. That means your yield to maturity also comes out to be 10%. You purchased the bond in 100000 rupees, and sold it out in 1.2 Lakh rupees. Its maturity was of five years but let say you sold it out in 1 year only. Because at that time the price of bonds was higher. And comes out to be 120000 you will gain profits.

You will gain a profit of 20,000 cause there's a difference in buy price and sell price. And you hold that bond for 12 months there- -fore you will have an interest gain of 10000. Your total profit comes out to be thirty thousand rupees. And your yield comes out 30000 divide by your investment. Hence yield equal to 30%. Means coupon rate of bond is not your actual income. Your yield to maturity is your real income. Now you purchased a bond of 1Lakh RS, and in future bond price decreases to 95000. and sold it after 12 months.

Hence you had a capital loss of 5000 ₹. Interest income of ₹ 10000. And your total profit comes out 5000 rupees 5000 divided by 1lakh investment.

That gives you a yield of 5% only!. Now you will ask for yield we should know buying and selling price both. so how on fixedincome.com this yield to maturity is showing me in advance? They are assuming that you will hold bonds till maturity. Because holding till maturity company will return you only face value. You won't be getting the price which is in the market. So whenever you want to invest in bonds or debt funds. You should always look for yield to maturity number. Assuming that if I hold this investment till its maturity. Then my annual returns will be equal to yield to maturity only and only based on this you should invest money on that.

It's also not necessary that you are buying prices equal to your face value. Because you are not subscribing the bonds on their face value. You are buying the bonds from the secondary market in their current price. That price may increase due to one more component. definitely That component is accrued interest. and this is a very simple concept The company said I will pay the bond interest together in 12 months. on 31st December. And you hold that bond from January till September end.

And now you are selling that bond to me. Then definitely you will say that I hold that bond for 9 months 9 month interest should be mine, but as the interest gets credit on that day you will have a bond. And the company will give you the whole 12 months interest. So that's why you will pay me the accrued interest. Because you will get the whole 12 months interest. In that, you have already paid me for 9 months. And if you hold that bond for three months only, then you will automatically get the 3 months interest, and I will get my 9-month interest. So this is accrued interest. You can see this in fixedincome.com before investing in bonds.

After that, your buying price is decided. So bond's current market price after fixedincome.com margin and including accrued interest. Your investment amount is decided. On that investment amount the returns to maturity. That's called YTM i.e. yield to maturity. This will show you that leave the bonds to face value.

How much amount you are putting in this bond from your bank account, on that how much you will get returns. And that's ytf. Now before investing in bonds what should we look for? And what's its meaning let's know this from the fixedincome.com portal To create an account on fixedincome.com is like any other sign-up process. As you create an account. Here you will be seeing some top offers. like bonds in which you can invest directly, however my first approach this I just identify my needs.

So after further studies, I could make my decision. So what could be need it could be tax-free bonds, issued by PSU or the government bonds. Which here are defined as the sovereign bonds and as I told you they are risk-free. Or my need could be high return bonds. Here I could see many results. which by the way 24 Studying all 24 bonds is quite hectic.

That's why I will use filters according to my requirement, there are two bonds. Both of them are PSU bonds. And both yield is same one is 6.7 and one is 6.85. Both maturities are also the same 9 years 11 months. But the above one has 1 lakh minimum investment only. And beneath it have 6 lakh. Let see the one lakh one. Here you can see some important details like issuer's name, Power Finance Corporation limited security 7% Power Finance Corporation Limited 2031 in it's starting.

You can see the coupon rate which is 7%. And in its end, you can see 2031 its maturity date. And that same information is given separately, coupon rate 7%. Issue date 22 January 2021. Maturity date 22 January 2031. And coupon frequencies are annual. That means I will get its interest payment every year on the same date. At the left of the issuer's name you could see a small arrow, After expanding it you could see all the details of this bond. For example multiple institutions have given it a AAA rating. Issue sizes of 500 crores.

Face value is 1000 rupees and this bond is secured. This means some real asset is linked behind it. After selling it, your money can be recovered. As I told you the coupon rate is 7%, but the yield is 6.7 %. And this is only your actual return. The coupon rate is 7% because it's on one lakh rupees, you are not purchasing it for 1 lakh rupees. You will pay 102.1 rupees for every hundred rupees. This means you are paying 2.1 % extra to purchase this bond. Including the accrued interest of 613.7 you will have to pay. And adding this all your total the amount will be ₹ 1,02,713.7 per bond. So your actual investment is a bit more therefore your return is also less.

Scrolling down, you will be to see interest payment schedule, on which date you will get how much interest. and last you will also be able to see face value. Which are 1lakh rupees in this case. And you will be getting interest payment every year according to bonds duration. let's see a corporate bond. Its yield to maturity is Insane. 9.28 %, from Shriram Transport Finance Company. Its tenure is 7 years 1 month, and the minimum investment is 10 lakh rupees. Interest payment frequency is annual.

After going to its view detail you will get its other detail security name is 9% Sriram Transport Finance Company Limited 2028 means its coupon rate is 9%. And it will mature in 2028. Similar by clicking this left button. We can expand it to know it's further details. And here you will get its rating India rating and CRISIL rating. Has to give it an AA+ rating. On which you should look at. Its face value is ₹10 lakh. And issue size is 995 crores.

And it's an unsecured bond. Unsecured means there no real asset behind It. Through which your money can't be recovered by selling it. just because its yield to maturity is too good which is 9.28%, that doesn't mean you should invest blindfolded. This is a corporate bond which is an unsecured bond. So you should consider this all things and take your decision. And the good thing is that on fixedincome.com these all things are shown clearly.

when you scroll down, You will understand that is coupon is 9% but, why it's yield is so much high? Because this bond is available at discount. Because you are paying 98.56 RS per 100₹ only. And after paying accrued interest of 83,360.6 you will pay 10,68,961 rupees And scrolling down you will be able to see its interest payment schedule. And on which date you will receive the amount, a table as interest income.

And on which date you will receive your principal amount. One more thing you should check that. In IM means information memorandum. By downloading this 1st pdf file. This is an official document provided by the bond issuer. In it, all details are mentioned regarding the bond. But the bad thing is this file is too big. Here it's 110 pages. We don't need to read the whole file. Simply by pressing Ctrl+F, and type a word. That word is seniority. And will come to that word directly. And in front of seniority, it's written yes.

That means. If somehow company gets destroyed then, after selling all the assets of the the company, the remaining money left then who will be the 1st owner of that money? If there is written yes or senior. That means if you invest in this bond, then you will be the first to own the company's money. Usually, the shareholders are at last.

Because they are the owner of the company. But the person giving a loan to the company, means bondholder their right should be on priority. If there is yes then the right on company's money is ours (Shareholders) It could also happen that in some bonds the seniority level is low. You can check it from here As I already told you this is an unsecured bond. You can see that written in this document. However, to check this you don't need to open the IM, because it's available on fixedincome.com in front only. Similar if you are interested in government bonds. By clicking on sovereign bonds you will be able to see all the bonds. For example the government of West Bengal bond. In tax-free bonds, you will be able to see tax-free bonds.

Currently, there is nothing. Currently, there is nothing, but whenever It will be there you will able to see and if you wanna sell a bond, by going in sell request you can place it in sell request. And on the right side, there is an option for a bond loan. Now you understood the things related to bond Now the question is in which bond shall we invest in? As Banks aren't able to maintain their NPS. big institutions after having AAA rating defaults. I personally recommend investing in government and PSU bonds. Because I have big capital.

Which I want to invest in for a long time. And through which I want to generate a fixed income. And this is the only objective. Personal I would like to invest in government and PSU bonds. And I told you that there are 3 types of PSU bonds. 1st the normal PSU bonds which are taxable. Just you have to give the tax on your interest income.

2nd types of bonds are PSU tax-free bond in which interest is completely tax-free. But if you sold it to someone's else in the secondary market. By which you had a capital gain. Then you had to pay capital gain tax. and the 3rd which is under section 54EC. If you sold a house property or land then, whether commercial or residential having a profit less than 50 lakh, within 6 months if you invest in some PSU bonds. Under section 54EC Then your the house property gain will be tax-free. But the interest income through that bond will require tax. And there are 5 years locking too.

Now let's understand the tax on bonds. This is a bit different from debt mutual funds. If you invested in a listed bond. means it tradeable over stock exchange so, in that long term capital the gain will be considered when, when you held it for more than 12 months. And then sold it. And short term the capital gain will be considered when you sold off before 12 months and the tax will be just like equities or shares. The short term capital gain will be added to your income. And according to your slab the rate you have to give tax. on long term capital gain you have to give a tax of 20%. And will have the benefit of indexation. On LTCG one more option is available to you.

If you wish you can give tax of 10%, but you won't receive indexation. other types of bonds that are unlisted. If you invested in them then you will sell it within 3 years then you will have a short-term capital gain. And after holding till 3 years then you will have a long-term capital gain. Or loss, then again the short term capital gain gets added to your income and according to the slab rate, it will have tax. And in long-term gain, you have to give a 20% tax with an option of indexation. 10% tax option is also available but it's only for NRI.

In case of unlisted bond and in that also, you won't get the benefit of indexation. and long term capital gain in the case of listed bonds, on which you have to give 10% tax. This was the thing if you are having a capital gain over a bond then how to pay its tax And on the bond the coupon rate you are getting. Will be added to the income from other sources. and you have to pay tax according to your slab rate. bonus tip The bonus tip is whatever the bond you are holding you can raise a loan against it.

This option is available on fixedincome.com portal. You have to click on the loan against the bond. You will get the other stuff by your own. But the point to be noted is. The bonds are holding your not transferring its ownership. You are just giving them. That means the interest rate or the coupon rate on the bond. that will receive by you and the payable interest on the loan. That you have to give to the bank. let's say your interest is of 12% and coupon rate is 7%. means you are earning 7% and giving interest of 12% too.

That brings your effective the interest rate on your loan to 5%. This is a very good feature if you are too much needed. for a loan then you can take it against your bond. It's not like that if you are holding a bond of 10 lakh then you will get the loan of 10 lakh too. You will get a low amount. you have to discuss it with them But this is the feature you should know. Before you create an account on fixedincome.com from the given link. and start Investment in bonds. If you are investing in PSU tax-free bond Is a good option but you will only get the tax-free interest.

If you sold it at a higher price. and on that, you had a capital gain then you have to give tax on it. The coupon rate is always calculated as a percentage of face value. if the bond face value is 1000 rupees whether you have purchased in 2000. So that doesn't mean you will get coupon rate at 2000. The coupon rate will always get on face value. So that's why it's very necessary to understand the YTM concept.

Because that tells you how much to return you will be getting. From purchasing bonds from secondary the market you have to give premium over face value. Because it's current the market price may be high. And with it, you have to also give the accrued interest too. with it, fixedincome.com will added its little bit margin to.

But again you should know how much the amount you will get after investing And always check the yield that is YTM [Shortcoming of bonds] there is, but not of fixedincome.com I would say it's general a shortcoming of the bond market. Just liquidity will be less if you want to sell before its maturity. How to sell? You will get this option on fixedincome.com. Selling bond before its maturity but there are 2 things first, fixedincome.com will purchase your bond from you and give you money.

It's on them if they wanna buy or not. In that case, you have to wait for a few days until someone is there. until that you can't exit from it That's why you should invest by thinking that, that I don't need money for a long period I want to earn stable returns over my money. Within less risk, so that's why you should invest in which you are no taking risks. And want to generate fixed income And ready to hold it till maturity. if an uncertainty occurs that different. So, I will meet you very soon Till then please press the bell icon and follow me on instagram BYE [outro music]