😮the next best thing
Even better than FDs?
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Welcome to In The Loop➰
A biweekly newsletter that brings you valuable insights from finance, business, and tech to help you take your net worth #ToTheMoon🚀
This is the third edition of our new Bite-Sized Finance series that will cover the essentials for investing, savings, and making more money. All in less than 3 minutes.
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If I were to describe these past two years in a word, I'd say 'uncertain', 'volatile', 'panic-inducing.'
"Hey, you just used three different words!"
Well, you caught me🙌 But the point is, I hate them all equally, especially so when they're avoidable. Like when I'm investing.
And if you're a conservative investor trading amid such volatility, you might wonder: Is there an alternative that earns me more than FDs but also has the same risk exposure?
Yes, there is. Bonds.
So what are they?🤔
Let's say a company wants to raise capital. They can raise it by issuing stocks or take a loan from the bank. But both processes involve too much hassle. So what they can do is, borrow money from people like you and me for a specific period at a certain interest rate.
That's exactly what a bond is. It's a loan taken by a company from the public.
They're fixed-income securities, meaning the company has to pay the interest amount even if their business defaults. And this is why many risk-averse people are investing in bonds right now.
But there's one bond, in particular, that's faring better than others. They're called Covered Bonds.
These are bonds backed by companies AND a pool of assets held by them. So when the company defaults on interest payments, investors have a claim on these assets.
Since the last fiscal year, covered bonds have grown five-and-a-half times from Rs 400 crore to Rs 2,200 crore. Moreover, they’ve produced great returns to bondholders - yielding as much as 12.75%🤯 For context: FDs offer at most 7% per annum.
But that's not all.
In fact, some believe that covered bonds are going to play a pivotal role in uplifting India's bond market.
Why? Because they offer creditworthiness to the lower-rated issuers, which is very important for them to build trust. Plus, it allows them to raise money by offering lucrative interest rates to investors.
Seems like a no-brainer investment right?
Well, hold on. Before you start buying bonds, there are some things you need to know about these so-called boomer assets.
Share what you learn 🤝
"Wide diversification is only required when investors do not understand what they are doing." — Warren Buffett.
When dealing with securities you're unfamiliar with, it's best to diversify. And bonds are an alternative that can help you do just that.
Well, that's all for today. If you found this newsletter insightful, share it with your friends and colleagues and let us know what you think in the comments.
Ciao! 👋