Investing in debt is one of the best forms of investing, considering the returns. In the recent times, it has become a popular form of securing the future whether it’s your child’s marriage, higher studies or even planning for your retirement because it is considered more secure than equity. Before you take the leap, take a look at the three main aspects and invest your time in some knowledge, before you start off:
1. Risk
Every investment has a certain risk attached to it. Remember, higher the risk, higher will be the returns. But, it is also a question of how much of risk you will be able to tolerate.
- Evaluate credit risk
When you invest in a particular company, evaluate its credit rating so that you will get an idea of the risk you are about to sign up for. Sometimes, there may be growing companies that are on public offers at attractive prices, but this doesn’t necessitate the fact that you will gain profits. Taking into account the stability of the company, make an informed investment.
- Risk Appetite
This is a measure of how well you consider a gain or loss. Your risk appetite determines how much and for how long you are willing to stay in the debt market.
- Diversify
Diversifying your portfolio is perhaps the best way to reduce your risk. Do your own research and invest across different types of debt and not just one particular type.
2. Returns
How much money you are going to put in, depends on how much you are expecting from your investments. Make a clear financial plan so that you will know where and how much to invest.
- Effective yield
Read up on the past records or market share variations so that you can expect an approximate value as far as effective yield is concerned. If required, get an expert’s opinion on this, so that your calculations won’t be far off from the actual value.
- Interest rate fluctuations
Though the rate of interest on your returns is higher for blue-chip companies, be aware that there is a chance for fluctuations when there is a change in the economy such as the recent recession.
- Taxes
After doing all your research, before you take the final step of actually putting in your money, make an estimate of how much of your returns will be taxable. There are various calculators available online, which will help you analyze exactly the value of returns that will reach you after deducting tax.
3. Liquidity
Liquidity basically means the ability to buy or sell a stock easily (without forgoing too much on its market value)
- Potential liquidity
The liquidity of debt investments is an important point of consideration because; your funds get locked in till the maturity date. Especially in the case of long term, the liquidity aspect plays a vital role.
- Exit route
If you feel that the debt market is not doing too well, or if you have sufficient proof to back it up; have your own exit route, i.e. choose the right moment to sell your debt portfolio in such a way that you make little or no loss against losing it all.
- Penalties
Be aware of the certain penalties that may be applicable when you try to sell before the maturity date.
Gaining maximized returns is what everyone wants to focus on, however if you want to do that then there are a few things you will need to consider and carefully analyze. The best feature about debt investments mainly fixed income investments is that you get fixed returns despite market variations.
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