Appropriate Investments – Need of the Hour:
In order to better plan one’s financial resources; individuals make it a point to distinguish between their earnings, spending and savings beforehand. Once they get a clear cut idea about the funds that are going to be left behind with them, do they start putting together an investment plan. Generally, investment decisions are taken solely on the basis of an individual’s personal preference coupled with his or her understanding of the investment market. Though, different people invest at different investment hubs, bonds are considered to be a universal favourite till date.
Bonds – Getting to know them better:
To put it in the simplest terms, bonds are nothing, but a secured method of investment. Once you decide to invest in a bond, your funds are likely to be blocked for a couple of years. You tend to earn a certain percentage of interest on these bonds.
At the primary level, bonds are classified into two categories namely government bonds and corporate bonds. As the names rightly suggest, the former is issued by government entities, while the latter falls under the jurisdiction of corporate houses. The objective behind issuing government bonds is to finance both capital and revenue expenditures. On the other hand, corporate bonds are issued with the goal of fulfilling certain development and expansion plans.
One important term that completes the world of bonds is YTM. YTM stands for yield to maturity. This term refers to the rate that an individual gets paid in every case when the bond is held till the very end that is till the date of maturity.
Getting to understand bond yields:
Any bond comprises of different components, which when used in connection with one another helps to derive bond yields. Certain important elements include the face value of the bond, its market value and also its coupon rate.
Furthermore, when focus is laid on the aspects of amount of interest paid and market value of the bond, will one be able to derive the current yield. For each and every bond the correlation between the current yield and coupon rate tends to differ mainly because of the different market and face values sported by the bond in question.
When the market and face value of a particular bond is one and the same, the current yield is equal to the coupon rate.
When market value of a bond exceeds its face value, the current yield will be less than the coupon rate. The effect will be in the reverse in cases where the face value is higher than the market value of the bond.
The Causal link between Bond Yields and Savings:
However the fact that bond yields have an extremely strong impact on an individual’s savings is totally undeniable. Even though no direct influence can be noticed, indirect impact is in the form of rising or falling returns on one’s long term investments.
People, who have invested in debt instruments, are likely to experience dual benefits as far as return on their investments is concerned. This is because, irrespective of whether or not bond yields rise higher or fall down further; in either case you are likely to enjoy massive advantages in the form of average returns on long term investments.
Individuals from a regular Indian household prefer to invest in small savings schemes such as post office deposits, KVP’s, NSC’s and PPF to list down a few. The interest that one draws on these schemes depends largely on the bond yields. This is because the rate of interest on these deposit schemes is fixed on the basis of the bond yields in a particular year. So higher the bond yields, brighter are the chances of you enjoying handsome returns on your small savings investment schemes.
Just like the above case, bond yields tend to impact people’s retirement savings as well. Schemes like NPS depend a lot on the bond yields. Higher the yields better are the chances of an individual securing his/her post retirement life.