What are secured bonds & why you should invest in them?

A bond is a debt instrument where an investor gets a fixed time bound return on their investment. Unlike an equity instrument, the return on a bond is known at the time of investment. It is tradable on the stock exchange, which gives liquidity benefit to the investor. Italso offers a better rate than fixed deposits and better tax treatment, thereby increasing the overall return for the investor. Further, bonds are a good diversifying instrument that protects the investor portfolio from market shocks.

Bonds can be of two types – secured and unsecured. In a secured bond, the issuer of the bond provides specific assets as collateral for the bond and offers a safer investment option as compared to unsecured bonds.Since the issuer’s assets secure the bonds’, these are considered to be safer as compared to equity financial instruments. Unlike unsecured bonds, in case of a default, an investor can recover their initial investment from the pool of assets. They are not left high and dry, running from pillar to post.

There are two types of secured bonds - Corporate and Sovereign Bonds

1. Corporate bonds are issued with a security that can be in the form of a warehouse, high value machinery, or any other assets of the company. In case a company defaults in making the payment, investors have the flexibility to use the security to claim their investment repayment.

2. Sovereign Bonds are issued by the government to raise funds for redevelopment or repay certain debt. The interest is dependent on the creditworthiness of the issuing government. Since the bonds are issued by the government, they are considered safe.

A secured bond offers tangible benefits when compared with other investment instruments

• Investing in a secured bond is relatively safer than equity investment
• It provides security against failure to repay / company default
• It offers a regular fixed income which is more than fixed and saving deposit rates
• Itis an asset-backed instrument that provides investors with a steady cash flow
• It is tradable in the secondary market and can be sold through a Demat account
• Investing in bonds allows an investor to diversify their portfolio
• Bonds prices are more stable than equity prices
• Interest income on bonds held in Demat is tax-free

Closing thoughts

Before investing, one should also assess the risk appetite, financial goals, interest and investment horizon. Secured Bonds are a popular form of investment due to the security it offers, regular income it provides and it is an ideal financial instrument when you want to diversify your portfolio.