Bonds and Interest Rates are joined to the hip and 2021 was not regarded as a stellar year for this instrument. The prices have been falling more so now after the announcement of increase in Fed Rates. The Federal Reserve is likely to begin raising interest rates in 2022, potentially raising bond yields and lowering bond prices.
Read also- How to profit from rising interest rates.
Indian central bank is expected to follow and prices can fall in the domestic market as well.
You can make money from bonds in two ways only -
a) by holding it till maturity or
b) by waiting when interest rates are low and prices (which are inversely related) are high and then selling it.
Thus, one can look at purchasing different types of bonds such as tax free bonds, corporate bonds, government bonds and zero coupon bonds in the coming year.
Here is one look at why bonds are the best investment option in 2022.
Investors worry that high inflation will abrade the value of money they receive from investments. Inflation is outpacing the increase in household income and is impacting consumer confidence badly.
Surging inflation is negatively impacting the Indian economy as well. Bonds such as government bonds, corporate bonds and zero coupon bonds mitigate the impact of inflation on the profit earned by investors.
When inflation rises, interest rates rise, and bond prices fall. Investors can hedge the immediate effect of inflation by investing in short term bonds. When interest rates rise, an investor can buy bonds online for shorter maturity that enable investors to roll over the bonds frequently at higher interest rates.
2. Tax Benefits
There are multiple types of bonds in India. An investor can avail of the tax benefits by investing in tax saving bonds and tax-free bonds. An investor can invest in bonds online and earn interest on them. An income-tax department provides the tax-benefit on earned interest under Section 80CCF.
Infrastructure bonds give interest 8–9% p.a usually. An investor can invest in the secondary bond market and reduce his taxable income by Rs. 20,000 in a year.
3. Green bonds: a new investment option
Under Budget 2022, the Government of India(GOI) is planning to issue sovereign green bonds with tax benefits. Green bonds proceedings are used to finance environmental and sustainable projects. Investors can invest in green bonds and enjoy the tax-free interest amount and contribute to the growth of the nation as well.
4. Lower credit risk
Low-risk profile investors worry about credit risk associated with their portfolios. An investor can invest in bonds online and get relief from fear of default risk/credit risk.