Bonds give you a viable avenue for generating passive income. You can even start with a paltry investment of Rs 10,000 and earn a steady stream of monthly income through an interest payout. Though, the specific amount earned each month depends on various factors, such as the coupon rate on bonds and the terms of the investment. Bonds allow investors to supplement their regular earnings and work towards achieving their financial goals.
Explaining how one can one passive income with bond investment, Vishal Goenka, Co-Founder of IndiaBonds.com, said that on an initial investment of Rs 10,000 in bonds, an investor with a monthly take-home salary of Rs 25,000 can earn a regular monthly income. To estimate the monthly earnings, you can use the following steps:
Here’s how interest calculated
Calculate the annual interest income by multiplying the bond investment amount (Rs 10,000) by the annual interest rate (coupon rate). For example, if the bond has a 10% annual interest rate, the annual interest income would be Rs 10,000 x 0.10 = Rs 1,000.
Divide the annual interest income by 12 to determine the monthly interest income. In this case, Rs 1,000/12 = Rs 83.33.
So, with an initial bond investment of Rs 10,000 and a 10% annual interest rate, the investor could earn approximately Rs 83.33 per month from their bond investment. It’s important to note that the actual earnings may vary depending on the specific terms of the bonds and market conditions.
Additionally, this is a simplified calculation and does not account for factors like taxes or potential changes in interest rates over time. Nonetheless, it illustrates how investing in bonds can provide a regular source of income to support one’s lifestyle, especially for young individuals looking to develop a saving and investing habit.
How regularly will you get a return on the tenure of your investment?
The frequency of returns from bond investments depends on the coupon payment terms set by the issuer. Typically, bonds pay interest semi-annually, although there are variations such as monthly, quarterly, or annually. For example, government securities and most corporate bonds tend to offer semi-annual payments.
Goenka said that investors should carefully consider the coupon schedule as it impacts cash flow and the reinvestment strategy. It’s vital for investors to align these payment frequencies with their cash flow needs, ensuring a steady income stream that complements their financial planning.
What are the levels of risk (high risk high return – low risk low returns) involved in different types bonds when invested?
Bonds are categorized into various risk profiles based on their issuers and credit quality. At the lower risk end, government securities generally offer safer returns and lower yields as they are backed by the sovereign guarantee – these are between 7.0-7.4% yield at the moment.
Moving up the risk scale, PSU bonds and stable corporate bonds with high credit ratings (e.g., AA and AA+ rated) provide slightly higher yields with moderate risk.
At the higher end of the spectrum, high-yield bonds offer the highest returns but also carry relatively higher risk – one can earn between 11-13% yield. The adage ‘high risk, high return’; ‘low risk, low return’ aptly summarizes the risk-return dynamic in bond investments.