5 facts you do not know about bonds in India
So, you know that bonds are fixed-income securities that offer interest. You may also know that they are debt instruments and that investing in bonds helps with capital protection. You may have also heard that bonds are an effective way to hedge stock market volatility. But do you know these five facts about bonds in India?
1. The Indian bond market is almost as big as the equity market
Many investors believe bonds in India to be a small part of the financial markets, but facts will tell you otherwise. As of 2020, the size of the Indian bond market was $2 trillion, which is not too far behind the Indian equity market cap of $3.2 trillion. The overall bond market in India has been growing at a rapid pace – at a Compounded Annual Growth Rate (CAGR) of 14.68% between 2010 and 2020.
2. You do not have to hold bonds until maturity
Bonds are fixed-income securities that help with capital protection and setting up a source of passive income. While many investors hold the bonds until maturity to earn regular interest over the maturity period, you also have the option of selling the bonds in the secondary market before maturity to earn capital gains. Bonds in India trade in the secondary market in a similar way that stocks do.
3. Bond market sees more activity when the stock market is volatile
When there is uncertainty and volatility, investors’ priority switches from capital appreciation to capital protection. Hence, they tend to withdraw their investments from the stock market and look at investing in bonds instead. This has been seen time and again throughout history. Even when the COVID-19 pandemic broke out and BSE Sensex crashed over 1,000 points, bonds did well. Between January and May 2020, the S&P BSE India Corporate Bond Index rose from 172.04 points to 181.63.
4. Bonds in India are traded over the counter
Once bonds have been issued in the primary market by the government or company, they trade in the secondary market. However, unlike stocks, bonds do not trade on stock exchanges. Instead, most bonds in India are traded over the counter. So, when buyers and sellers want to trade bonds, they do so through brokers and dealers and there is no centralised exchange. This does make the bond market less liquid and transparent. However, depending on the type of bond, its credit quality, etc., liquidity may not be an issue.
5. The central bank uses bonds to control the flow of money
The Reserve Bank of India (RBI) conducts Open Market Operations (OMO) when it wants to adjust the flow of money in the economy. By buying bonds in India in bulk, RBI increases the flow of money in the economy as the money is transferred from RBI to the investors. This is a helpful tool when the central bank wants to exercise an expansionary monetary policy. Conversely, when RBI wants to apply a contractionary monetary policy and reduce the flow of money in the economy, it sells government securities in bulk.
Investing in bonds is a good way to add debt diversification to your investment portfolio. Bonds in India come with different maturity periods, credit quality, and features. Make sure to choose the ones that best align with your financial goals and risk appetite by consulting a financial expert.
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