Debt Investment : Part 1
We have
discussed about equity as asset class in details our previous blogs. Now we are
moving towards debt investment. Debt means loan. It means borrower have
obligation to return money with interest to lenders.
In debt
market investor invest money as a loan with issuer at a predefined coupon rate.
Issuer may be any institution, banks, government, public sector companies,
private companies. Coupon rate is nothing but interest rate which issuer pays to
the investors at predefined regular interval.
Advantage and disadvantage of debt
investment:
- It is less volatile than equity market. Conservative investors invest in debt market for safety of principal amount. They feel more comfortable in debt compare with equity investment.
- In debt investment, investors get regular cash flow in the form of coupon which is predefined. Investors get coupon income at regular interval.
- It works on interest rate moment. The bond prices increase when interest rate goes down and investor can take advantage of capital appreciation.
- The return on debt investment is fixed. That is the reason investors feel more comfortable in this investment.
- However, it has less risk than equity but it gives low return and merely beat inflation. In majority of debt investment post tax return even not able to beat inflation.
- It is low risk and low return investment and retail investor cannot direct participate in the debt market. They participate in the debt market through bonds, debt mutual fund and PPF etc. Right price discovery is also problem in debt market.
- Debt investment has interest rate risk and credit risk also. We will discuss further about these risks in our further blogs.
We will discuss in our next blog
about the various available debt avenues and its suitability to the investors. If
you want more information regarding debt investment or you have any other query
related investment feel free to ask us.
Warm regards,
Arvind Trivedi
Certified
Financial Planner
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