Bonds - How to make the right investment in Bonds

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An investor has the option of investing in the bonds either directly by subscribing to these bonds or by choosing an indirect route of buying the units through Mutual Funds which invest in these bonds. Since Mutual Funds invest only in rated debt instrument, the risk is also minimised. The income from debt funds are therefore considered to be more stable.

Liquidity is one of the most important requirement of an investor and Indian stock markets are not satisfying this demand because of its sporadic trading, Institutions have innovated new alternatives to create liquidity in the bond markets, ICICI has initiated in this direction and came out with the market making exercise in the debt segment taken an initiative stock markets.

Anytime Facility:

Further, to provide liquidity to small investor it has recently come out with novel scheme known as Anytime Facility wherein an investor can buy or sell the safety bonds at any point of time. This scheme is being watched closely by the other institutions which may soon follow this trendsetter scheme of ICICI.


Tracing the returns from these bonds, one may notice the changes in the coupon rates depending upon the prevailing market interest rates. During the early 90's interest rates on bonds were around 13 to 14%. It jumped to 16.5% in 1996 to raper off again to about 12.5% in 1997. The strengthening of the interest rate are clearly visible with ICICI offering 13.75% in the its latest issue of safety bonds. IDBI is also planning to come out with the bond issue offering an interest rate of around 14 percent which is to be followed by Power Finance Corporation.

This fluctuation in the interest rates do create opportunities for the capital gains in the secondary markets. For example, the earlier bond offers from IDBI and ICICI which offered high interest of around 16% are now being sold at a price higher than their face value in the secondary markets. Thus, there exists excellent capital gains opportunity too for bond holders when interest rates go down in the general.

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