Why Should You Invest In G-sec STRIPS? 

The Indian Retail Debt Market is well set to expand further with a wide range of debt securities available for retail trading at public exchanges and the growing market participation. Some of these debt securities are Government Securities (G-Sec) – Zero-Coupon Government Bonds, Coupon Bearing Bonds, Treasury Bills, STRIPS. Let us understand STRIPS before pouring light on its benefits. 

Why should you invest in g-sec STRIPS

What are STRIPS? 

STRIPS (Separate Trading of Registered Interest and Principal of Securities) are essentially Zero-Coupon Government Bonds investments. These are formed out of existing G-Sec bonds. These are not auction-based securities. Being G-Secs, they are eligible for Statutory Liquidity Ratio (SLR). 

STRIPS are reconstituted by splitting the cash flows from a G-Sec into individual securities. The cash flows of G-sec bonds are a periodic interest and the principal repayment to be paid by the issuer. 

How G STRIPS Work 

Stripping is the process of isolating coupon-bearing bonds into their individual coupon and principal components.  

Investors can hold and trade G-sec STRIPS separately – individual interest and principal components of eligible G-Sec as separate securities. 

All fixed coupon G-Secs, irrespective of the maturity, and that are transferable and eligible for SLR eligible can be Striped.  

For example, if Rs.1000 of the 7.8% G-Sec 2025 is stripped, each periodic coupon (interest) (Rs. 39 each semi-annual) will be a coupon STRIP, and the principal (Rs.1000 at the term-end) will become a principal STRIP. These are traded separately in the secondary market.  

Another example – A 8-year bond is eligible for striping into 16 coupons and a principal instrument. All these become zero-coupon bonds and can be traded separately. 

What are the benefits of G-Sec STRIP Investment?  

  • Zero Reinvestment Risk   

Being zero-coupon bonds, STRIPS has zero reinvestment risk that make the investment attractive to retail investors. These are considered more secure than AAA Corporate Bonds. Investors with a low-risk profile like individual/non-institutional customers can consider G-SEC STRIPS. Hedge funds, Pension funds and Insurance companies are equally interested in STRIPS.  

  • Options Available for Different Tenure  

Financial goals differ for every investor, and they need diverse investments that can be aligned with their set objectives. One such investment is STRIPS. Investors can choose from Coupon STRIP and Principal STRIP available with broadly classified term options based on their financial requirements for established goals. 

  • Higher Returns than Other Debt Securities 

STRIPS can offer better returns than FD and tax-adjusted AAA corporate bonds. As a STRIPS investor, you will periodically receive the bond’s original coupon payouts (g-sec rates). For example, if the coupon on a bond is 6% (half-yearly), the interest will be received twice because of the semi-annual payment schedule. 

  • Low Government Bond Investment Amount 

Investors need not invest huge funds in G STRIPS. With the reliving investment terms, you can invest as low as Rs.1000. It is the lowest minimum investment that you can increase as per your financial goals to be achieved with a G-Sec STRIPS investment. 

  • Safety  

STRIPS are created by splitting each of the cash flows from government security bonds. As it is an investment in Government bonds, these are free from default risks and considered a safe investment. 

How to Buy G-sec STRIPS 

Investors need an SGL account with the Reserve Bank of India (RBI) to buy STRIPS. You can place requests for STRIPS directly in e-kuber for stripping of eligible securities.  

Gilt Account Holders’ requests for STRIPS will be placed through the respective Custodian that is maintaining the CSGL account. 

Thus, STRIPS investment is a popular choice for investors looking for fixed-income through high credit quality bonds with the support of the government. For more guidance on ‘how to invest in G STRIPS’, you can approach financial investment advisors experts in Fixed Income Securities or can buy g strips online from Bondsindia. 

 

7 things you should know before investing in bonds in India 

Introduction 

India, the fastest-growing economy globally, offers some great investment opportunities. Investing in bonds is one of them. 

Bonds are the go-to asset class for fixed income investors. Although they’re not always liquid, they create low-risk returns which are widely accepted in the market.  

Investing in bonds is a great way to diversify one’s portfolio or knowing importance of bonds in your portfolio and earn a better return. 

Different types of bonds are available in India depending on the issuer, tax benefits, coupon rates, and options.  

Top 7 things to Consider Before Investing in Bonds 

Investing in bonds can be a whole new experience for most investors as the central bank or government of India bonds has allowed retail participation recently. There are various online portals like BondsIndia.com, which will show you in simple steps how to invest in bonds. 

7 things you should know before investing in bonds in India 

The vital things that investors might consider before they buy bonds online are: 

1. Yield   

One of the crucial factors that an investor can consider before investing in bonds is yield. 

The return that investors earn for holding the bond till maturity is known as yield.  

The yield of the bond & the bond’s price is inversely related. So, if the yield of the bond decreases, the bond’s price will increase, and if the yield of the bond increases, called as higher yield bond, the bond’s price will fall. 

2. Risk 

For investors, it would be best to analyse the risk involved in the bond before investing.  

Investing in bonds is not as risky as investing in stocks, but it does come with some risks, such as inflation risk, credit risk, interest rate risk, etc.  

Before making an investment decision, investors need to be well informed of these risks. 

3. Rating 

All the bonds in the market come with a rating. AAA to BBB is considered investment-grade bonds, and BB to D is considered non-investment-grade bonds.  

The credit rating of the bond shows the borrower’s creditworthiness. The bond with the highest credit rating is considered to be the safest and vice versa. If the rating of a borrower is poor, investors might not get their money back. 

So, to make a sound financial decision, investors can analyse the credit rating of the bond and should always invest in higher rated bonds

4. Bond is secured/unsecured 

Before making an investment decision, investors can examine whether the bond is secured/unsecured. If a bond is secured, the investor’s money will be protected if the borrower defaults. On the other hand, if it is not secured, investors might lose their money if the borrower defaults.  

5. Taxation 

Just like any other asset, income from bonds is also taxable.  

The interest earned by investors on the bond is taxable as per their slab rate. However, any income generated on the sale of bonds is considered capital gain and taxable as short-term/long-term capital gains. 

There are bonds like tax-free (zero-coupon) bonds which do not pay any interest, so there is no tax on interest income, but capital gains will be taxed.  

If investors have a house property and they sell it, they can invest these proceeds in 54EC bonds or capital gain bonds, which will provide them 100% tax exemption on the long term capital gain earned by selling the property.   

6. Option attached with bonds  

Many bonds come with embedded options such as – the call option & put option. 

The call option gives the issuer the right to call back the bonds from the bondholders before maturity. The issuer usually does this if the interest rates start falling. This is also known as call risk. 

On the other hand, in a put option, the bondholders can return the bonds before maturity to the issuer if the interest rates start increasing.  

Thus, investors are advised to analyse whether any such option is embedded in the bonds they wish to purchase.  

7. Debt obligations of the issuer  

Before investing in a bond, investors are recommended to assess the issuer carefully and know how to invest in bonds in India. They can check the repaying capacity of the issuer, the purpose of taking a loan, how they are planning to pay the loan, etc. To do this, review the financial statements of the issuer.  

Conclusion 

Unsurprisingly, bonds are one of the most widely held types of investments in India. Even though they are less riskier than other instruments, they are subject to a different set of risks, which have been informed by market dynamics since the advent of modern financial markets. 

Investing is not a game or a one time task.  

Thus, an investor needs to carefully analyse the important considerations before making an investment in a bond. 

Investing in bonds will not only require attention at the time of investment but throughout the time the bond is held by the investors. 

What are the Advantages of Investment in Bonds over Fixed Deposits as well Stocks?

Investment in Fixed deposits and bonds investment are the most debatable but preferred investment choices other than stocks. These are different investments in terms of benefits and risk factors mainly. While fixed deposit interest rates are low, yields on quality bonds and returns on fundamentally strong stocks are higher. An investor should understand the pros and suitability of all these investments to create a balanced bonds portfolio.

Advantages of Bonds over Fixed Deposits and Stocks

Bonds are an important part of any diversified portfolio. Bonds may be less exciting than stocks, but they offer numerous benefits over stock investments and investment in fixed deposits. Let us tell you key benefits among those. 

What are the Advantages of Investment in Bonds over Fixed Deposits as well Stocks?
  • Bond investment is a safer haven for your funds. 

Investing in debt instruments is safer than equity. Bonds mean a debt investment, and stocks mean equity ownership. Debtholders are the creditors in the company and enjoy priority over shareholders. In case a company is on the verge of bankruptcy, debt holders are paid first. If the scenario is worse, the debt holders still get at least some of their investment and there are chances that the shareholders might lose their entire capital.

  • Bond Investments offer more stable and consistent returns.

You can Buy Bonds that generate attractive returns when the interest rates in an economy are declining and the stock market is down.

  • Bonds offer predictable returns. 

Looking at history, stocks outperform bonds, but it is hard to predict. Often bonds are predictable at a greater degree of certainty, unlike stocks. In certain situations in life, investors like retirees look for security and predictability over any other feature of an investment. Investors can predict their bond investment gains and determine the amount they need to contribute to purchase bonds to achieve their financial goals.

  • Bonds offer higher returns if held till maturity. 

Long term bonds interest rates (coupon) are usually higher than the fixed deposit. Most investors generally consider bonds for long term investments. Bonds have the potential to provide you with relatively better returns without exposing you to high risk, unlike stocks. If you hold your bond investments until it matures, you can gain significantly high returns.

How much should one keep for bonds investments?

There should be an optimal asset allocation in your bonds portfolio considering investing timeline, risk capacity, financial goals, and income level. Considering an old rule, investors can determine equity and debt allocation in their investment portfolio by subtracting their age from 100. An investor at 55 can allocate 45% of his/her funds to stocks and 55% to bonds and other investments.

The main categories of bonds are: 

  • Government Bonds – issued by the Government of India. 
  • Corporate bonds – issued by private companies. 
  • Tax saving bonds – generally issued by the government. 
  • Bank and Financial institution bonds – issued by banks and financial institutions.

These different types of bonds come with different time-frames, returns, risks, taxes and benefits to an investor’s portfolio. You can seek the guidance of experienced financial advisors to strategize bond investing considering market fluctuations.

What Are Dynamic Bond Funds? Is It A Good Choice To Invest In Dynamic Bond Funds?

A rise in interest rates is an unfavorable condition for bond investments because bonds start losing with an increase in interest rates. Bonds build an inverse relationship with interest rates. This is the reason that investors would prefer bonds with higher coupons to stay in profit even during a fall in case of rising interest rates. Among various mutual funds, one is dynamic mutual funds. These bonds in India do not possess any limitation towards durations. 

With a rise in interest rates, investors are gazing at dynamic bond funds to reduce the effect on higher bond yields like invest in AAA higher bonds yield, invest in AA higher bonds yield and invest in A higher bonds yield. In December 2021, investors started to turn to these funds. It is the only category across debt funds with positive net flows.

What are Dynamic Bond Funds?

Dynamic bond funds are open-ended mutual funds investments. These funds are quite flexible than other debt funds but at moderate risk. In these funds, fund managers have the freedom to invest in bonds with different durations/maturities. 

Is It A Good Choice To Invest In Dynamic Bond Funds? 

The straightforward answer is yes. Market experts envision a rise in interest rates at a faster pace than expected. The central bank RBI may be pushed to raise interest rates to cope with the increased velocity of price pressures. Many debt fund investors are confused about what strategy they should adopt to invest in central bonds. 

The answer is Dynamic Mutual Funds that are flexible enough to be benefited during the fluctuation period in the bonds market.

What Are Dynamic Bond Funds? Is It A Good Choice To Invest In Dynamic Bond Funds?

If you are amongst various investors confused in the bond territory, you can make bond investing easy with dynamic bond funds. Let us clarify about these funds, risks, and suitability to invest in Dynamic bond funds.

How Dynamic Bond Funds work?

Like other funds, the performance of these funds depends on the fund manager’s outlook and experience in the market. They can invest where they expect to earn maximum returns. Therefore, when the interest rates increase, they can look at short term bonds. If they expect interest rates to decline, they will invest in long term bonds for higher yields.

Fund management teams remain active to decide on bonds maturing within a few months and ones with maturity after several years. 

Considering the Yield to Maturity (YTM) of Dynamic Bond Funds, investors should know that the YTM of longer-term bonds investment is higher than that of shorter-term bonds investment.

Risk Factors

Flexibility towards bond investments in india does not mean that dynamic debt funds are sure shot winners. The primary risk is the error of judgement. A wrong call can affect the fund’s performance adversely. 

In case there is a lack of firm interest rates cues, the safe investment option in India will be proved a costly mistake. Hence these government bonds are considered moderate risk funds. 

Before investing in the corporate bonds fund, check the reputation of the fund managers. If the fund management team anticipates wrong, there will be huge losses. 

Credit risk is also a risk factor associated with bond funds. Higher rated bonds funds possess lower credit risk. You may find lower-rated bonds offering higher yields. Investors should not give up on checking the credit ratings in any situation.

If you are thinking about how to purchase bonds in India, you can buy bonds online from Bonds India.  

Investment Suitability 

Investors who are planning to invest for three to five years and want to avoid taking a call on rates can consider dynamic bond funds. Undoubtedly, duration strategy can ensure considerable returns as the fund can be altered based on interest rate changes. However, it is just a slip to cause losses. If you are an investor with a moderate risk profile, you can consider dynamic bond mutual funds. Conservative investors can avoid this online bond investment in India.

Thus, it is a good choice to invest in Dynamic treasury Bond Funds, depending on your risk profile.

 

Difference between Interest Rate vs. Factor Rate

Today, there are a wide variety of funding options available to small and medium-sized businesses. From traditional bank loans and lines of credit to invoice financing and working capital loans, it’s easy to find and compare various loan options to meet your financial needs and budget. 

One reliable way to choose the best small business financing is to compare the overall cost of the loan. To determine how much you’ll have to repay in total for your borrowed amount you need to look into the interest rate vs. factor rate. 

Difference between Interest Rate vs. Factor Rate
Difference between Interest Rate vs. Factor Rate

Many small business owners are familiar with the term annual percentage rate (APR) or simply interest rates but certain types of business loans represent the cost of funding in the form of a factor rate. So if you’re planning to apply for a small business loan, it’s significant to know the difference between the two. In this blog post, we’ll explain what makes both different from each other and why every small business owner should care.

What Are Factor Rates?

The factor rate is expressed in a decimal form and not in the percentages the way interest rates are calculated. These rates usually range from 1.09 to 1.47. Similar to interest rates, this signifies how much you’re going to pay to obtain funding.

Factors rates are most commonly used in short-term business financing like a Merchant Cash Advance, where repayment terms are very short, typically daily or weekly. Factors rates are rarely used in the small business funding space, but they are not difficult to calculate. 

What Are Interest Rates?  

The interest rate is one of the most common ways to signify the total amount (interest + principal) you would pay throughout the loan tenure. You’ve probably heard about this term since it’s how the most personal and business loans are priced. 

This is expressed as an annual percentage rate (APR) and is used for credit cards, home mortgages, and traditional business loans such as an SBA loan, term loan, line of credit, or equipment financing.

How Factor Rates Are Calculated?

Calculating your factor rate is not as difficult as it seems, you get the total amount by simply multiplying your borrowed amount by the factor rate.

For Example:

Principal Amount – $10,000

Factor Rate – 1.25

Term – 18 months

Total Repayment – $12,500

Daily Payment – $265

Weekly Payment – $173

How Interest Rates Are Calculated?

The method of calculating the interest rate is somehow a little complicated. However, the most sought-after small business financing options involve charging fixed or variable interest on a set of percentages of the remaining principal at defined, regular intervals. 

Here is the general formula to calculate interest on your loan amount:

Principal Loan Amount x Interest Rate x Time (aka Number of Years in Term) = Interest

For Example

Loan Amount – $500,000

Interest Rate (APR) – 7%

Loan Term – 10 Years

Total Repayment – $850,000

Monthly Payment – $7083

What Factors do Lenders Consider When Determining Your Factor and Interest Rate?

Factor Rate

  • Time in the business
  • Consistency of revenue
  • Seasonality of the business
  • Average monthly revenue

Interest Rate 

  • Type of small business loan
  • Your business and personal credit score
  • Business type and industry
  • Payment history

Which One is Better For You Small Business?

The greatest factors in determining which rate is best for your small business are the type of business financing you need, creditworthiness, or how soon you need capital. Short-term business loans such as invoicing financing and Merchant Cash Advance with factor rates are great for entrepreneurs who don’t have ideal credit score and collateral to put up but need immediate cash to run and grow their businesses. 

Factor rate financing may be beneficial for your business if you:

  • Need quick cash to manage day-to-day operations and other short-term business expenses
  • Want to make a steady and static payment
  • Recently launched a new venture but has a steady flow of revenue 
  • Have low or no credit score
  • Don’t have collateral to secure funds 

On the contrary, the interest rate can be a great option for small business owners who have a relatively better credit score or a little more time before they need working capital.

Interest loan financing may be a great fit for your business if you:

  • Prefer long repayment terms and lower EMIs
  • Have been in the business for more than 2 years
  • Want to choose and compare from a variety of loans
  • Have an ideal personal and business credit score
  • Have the ability to make payments on time
  • Show healthy business revenue

Bottom Line

No matter how you borrow money for your small business, it will always come with a cost. Loans with factor rates usually take shorter to get approved. The application process is typically more easy and fast and will require less documentation than financing like traditional bank loans.

Before choosing a loan type, it’s a smart idea to work with a financing professional you trust to help you choose the best loan options as per your current financial needs and budget. Besides, you can apply through an online lending marketplace like online bonds platform to find and compare a variety of loan offers from multiple lenders to see if you should go for interest rate or factor rate.