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Save Safely without any Reason

ICICI Securities 19 Aug 2022

“The first idea—simple, but easy to overlook—is that building wealth has very little to do with your income or investment returns, and a lot to do with your savings rate”, says the book- The Psychology of Money.  A high savings rate implies you can spend less than you could otherwise, and less spending ensures your savings go further than they would if you spent more. Because people radically require different levels of expenditure to get by each month- a dollar saved by one person is worth absolutely different to another.

A hundred years ago, 75% of the population did not have access to a telephone or regular mail. Therefore, it was extremely important to have flexibility. Many individual's actual competition were the people in their surroundings. Now, the entire world is a competition, and competing has becoming increasingly difficult. As it gets more difficult to compete, saving becomes increasingly crucial since it gives you the flexibility and time to wait for favourable opportunities in both your career and your investments.

The book further adds that- Return on investments can make you rich. However, whether or not an investment plan will succeed, for how long, and whether markets will cooperate is always a question. The results are enveloped with uncertainty. Learning to be happy with less money creates a gap between what you have and what you want, similar to the gap created by increasing your paycheck, but more manageable and in your control. Saving is a hedge against life's inevitability of catching you off guard at the worst possible time.

While, it is now concluded that Savings is paramount in nature, it is important to know- how to save money? How are savings going to be enduring in future? One of the most prominent ways to save money without any reason is Bonds.

What are Bonds?

Bonds are financial instruments in which an investor lends money to an organization or government for a specific length of time in exchange for regular interest payments. The issuer of the bond returns the investor's money when the bond matures. Bonds  are widely referred to as fixed income because your investment earns fixed payments during the life of the bond.

How can Bonds be a Safe Saving Strategy?

Bonds are primarily sold by companies to fund ongoing operations, new projects, and acquisitions. On the other hand, bonds are sold by governments to raise funds and to supplement tax revenue. When you buy a bond, you become a debtholder for the company issuing the bond. There are various types of bonds such as Corporate Bonds, Government Bonds, Agency Bonds, Municipal Bonds, etc. Investment-grade bonds, in particular, are less risky than equities, making them an important part of a well-balanced investment portfolio. Bonds can help to mitigate the risk of more volatile assets like equities, as well as provide a constant stream of income while protecting wealth during your retirement years.

Why Investors invest in Bonds?

Investors usually invest in bonds for the following reasons:

  • Bonds give a predictable stream of money by typically paying interest twice a year.
  • Bondholders receive their entire investment back if the bonds are held until maturity, therefore bonds are a good method to save capital while investing.
  • Bonds can help to mitigate the risk of investing in more volatile stocks.

Numerical Illustration of Bonds and its benefits:

Financial Term (Bonds)

Bond A

Bond B

Bond C

Price (as a % of face value)

100

90

110

Maturity (years)

10

10

10

Face Value (Rs.)

Rs. 1,00,000

Rs. 1,00,000

Rs. 1,00,000

Coupon Rate (%)

4

4

4

Yield to maturity (%)

4%

5.31%

2.84%

Bond A:

Bond prices are expressed as a percentage of their face value. Bond A is worth 100% of its face value, or Rs. 1,000,000. The bond will pay 4% of the face amount per year, or Rs. 4,000. Because most bonds are paid every six months, Bond A will receive Rs. 2,000 every six months. In addition, at the end of the ten years, the bond will make a principle payment of Rs.1,00,0000. The bond pays a 4% yield to maturity, because it is not trading at a premium or a discount.

Bond B:

The price of Bond B is 90% of its face value, or Rs. 90,000. Regardless of this, Bond B investors will still get a total of Rs. 4,000 in annual coupon payments, and bondholders will still receive the face amount of Rs. 1,000,000 when Bond B matures. Bond B carries a 5.31 percent yield to maturity based on the discounted price.

Bond C:

At Rs. 1,10,000 or 110% of face value, this bond sells for a premium. Bond C investors will receive a total of Rs. 4,000 per year in coupon payments and the bond's face value of Rs. 1,00,000 at maturity, just like Bonds A and B. Bond C's yield to maturity, at 2.84 percent, is lower than the coupon rate due to the premium price.

Due to the relatively steady interest cycles, there is no specific period to invest in bonds; however, risk-averse investors should consider bonds for investment. Individuals have multiple alternatives when it comes to investing in bonds, depending on their financial goals. Investors who are inclined towards safe debt instruments should focus more on bonds. Furthermore, investors willing to incur market risks may find it financially beneficial to amass bonds in order to earn a greater rate of return on these fixed-income assets.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Please note, bonds related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein mentioned are solely for informational and educational purpose.

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