Investing in covered bonds: A beginner's guide
What's the story
Investing in Indian covered bonds can be a smart move for those looking for stable returns. These bonds, which are backed by a pool of assets, provide investors with a sense of security and predictable income. As a beginner, knowing the basics of these financial instruments is important to make informed decisions. Here's a beginner's guide to investing in Indian covered bonds.
#1
Understanding covered bonds
Covered bonds are debt securities issued by banks or financial institutions, backed by a pool of assets such as mortgages or public sector loans. Unlike regular bonds, covered bonds offer dual protection to investors - from the issuer and the underlying asset pool. This makes them safer than unsecured debt instruments. In India, covered bonds are gaining popularity due to their risk-mitigating features and attractive yields.
#2
Benefits of investing in covered bonds
Investing in covered bonds comes with a range of benefits. They offer higher yields than government securities, while being less risky than corporate bonds. The dual recourse structure ensures that even if an issuer defaults, investors have claims on both the issuer's balance sheet and the underlying asset pool. This makes them an attractive option for risk-averse investors looking for stable returns.
#3
How to invest in covered bonds
To invest in covered bonds, you first need to open an account with a bank or financial institution that issues them. Once your account is set up, you can purchase these securities through primary issuances or secondary markets. It's important to understand the terms and conditions associated with each bond before making an investment decision.
#4
Risks involved with covered bonds
While covered bonds are relatively safer than other investment options, they still come with some risks. The main risk is interest rate risk, where changes in market rates can affect the value of existing bonds. There's also credit risk if the underlying assets perform poorly or if there's a significant economic downturn affecting issuers' ability to pay back investors on time.