Covered bonds are becoming an attractive investment option in India. They are unique bonds that provide a safer choice for investors compared to other options. Let’s explore these bonds are and why they might be a good addition to your investment portfolio.
What are Covered Bonds?
Covered bonds are debt securities that are issued by banks or financial institutions. A pool of high-quality assets, like mortgages or public sector loans back these bonds. So, if the issuer fails to pay back, investors have a claim on these assets. This dual protection helps make these bonds less risky as compared to other investment options.
Why Invest in Covered Bonds?
- Safety: These bonds are backed by a pool of secure assets. Hence, they are considered safer than regular bonds. In case of default, the investors can still recover their investments from the asset pool.
- Steady Returns: These bonds often provide regular and stable interest payments. Thus it makes them appealing for those looking for consistent income.
- Regulatory Support: The RBI is also promoting these bonds to strengthen the financial market. This regulatory backing can enhance investor confidence.
- Diversification: Adding these bonds in an investment portfolio can diversify risk. They add stability, especially during market volatility.
How to Invest?
You can invest in covered bonds through banks, financial institutions, or brokerage firms. It’s essential to assess the credit ratings of the bonds and the issuing institution. A higher rating generally means lower risk.
Example:
Let’s consider a example. A bank named “SecureBank.” SecureBank issues covered bonds worth ₹1,000 crores, backed by a pool of residential mortgages. Investors purchase these bonds, each valued at ₹10,000, with an annual interest rate of 7%.
If SecureBank remains stable, investors earn their interest every year. But, if SecureBank faces financial difficulties, investors can still claim the residential properties backing the bonds. This layer of security makes these bonds appealing.
Risks to Consider:
While covered bonds are generally safe, there are still risks. The main risk is the creditworthiness of the issuing bank. If the bank fails and the underlying assets lose value, it can affect your returns. It’s crucial to assess the financial health of the bank before investing.
Conclusion:
Investing in covered bonds can be a smart choice for those looking for safety and stable returns. These bonds can provide an excellent addition to a well-diversified portfolio. Whether you are a seasoned investor or just starting out, these bonds are worth considering for your investment strategy.
– Ketaki Dandekar (Team Arthology)
Read more about Covered Bonds here – https://www.investopedia.com/terms/c/covered