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.
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