Which Bond Should Buy — Covered Bond
By: Makemy Finance
Tags: Bonds, Financial Freedom, Taxes, Income, Investors

Money is a form of energy; everybody wants it. In society, people will say the love of money is the root of all evil. Many people believe that money doesn’t matter in life. Money is not everything, it is a way to afford anything. Talking about money is shameful in India. But the interesting fact is that everybody wants to get financial freedom. How it is possible? By going to a job, and getting money monthly is it possible? Yes, it is possible, if you manage it properly. It doesn’t mean how much money you earn. It means how much money you keep. And up to how many generations you can keep. To get financial freedom you need to create your Fixed Income. Where you can get every month a few amounts of extra money.

Fixed Income

You are earning money because you want to make your life better. Want to make your family safe and secure. You are keeping the money; it might be you want to buy a dream car, Dreamhouse. Wants to send a child to a good school. Traveling to the world and expressing the world fatalistic view. All these things will come true. When you will invest money and you will get returns. So, you need to create an income source where you can get a Fixed Income every month. So rather than investing money on FDs. If you can invest in some bonds, it can give you a very good return.

Which Bond Do I Need To Invest In Secure Or Unsecure Bond?

A secure Bond is a bond in which the issuer of the bond pledges an asset. As collateral in the case of default. Collateral might be machinery, Gold, Building, or any other investment. In case of any default, by selling all the pledges given to investors. An unsecured bond is a bond that is issued without any collateral. Because of collateral, many people agree to buy a Secure Bond.

But wait, is your security bond is secure? We everybody heard about DHFL. They also issued secure bonds. Finally, when a company defaults. It files for bankruptcy. Then there will be a lot of code for that pass to the court. It will take time. Slowly and steadily the court will collect money. Firstly, it paid to the government tax, income tax, GST, etc.

After that, the debentures holder will get the amount. In the last, equity shareholders will get the amount. Definitely, you will get the money but it may take time. It may take year on year. The question is not, Are you getting money or not? The question is when are you getting? Every single second, money is losing its value. Instead of taking time, if you invest it somewhere. You can earn some interest. So that’s why it says for long-run investing. Can give you a good return.

Is There Any Other Bond That Can Give Much More Security To Get Fixed Income?

A covered Bond is issued to get more securities. It is also known as bankruptcy-remote or bankruptcy protected. In Covered Bond, you will get 9%-11% returns.

A Covered Bond is a debt securities instrument issued by a bank. It keeps pledges an asset as collateral, in case of failure of the issuers. So that can cover the claim at any point in time? There will be a subject to specific legislation to protect bondholders.

Let’s Understand In A Simple Way

In the market, there are two types of people. One type of people who need money. And another type of people who have excess money. Needy people will go to the bank or NBFC to take a loan. NBFC has given a 1300cr loan to the people. As the NBFC will give money, the total money of the NBFC company will get reduced. Now they looking for raising funds. To assigning a 25cr home loan, they will issue a bond for 20 cr. They will contact big-big buyers like Wint Wealth. Who can give 20cr in one short?

Wint Wealth will agree to buy all 20cr bonds by assign with 25cr home loan. In the market that 25cr home loans worth is 100cr. But Wint Wealth worrying about if the NBFC couldn’t return the amount. Then Wint Wealth will appoint a third party that is SPV (Special Purpose Vehicle). SPV is a debentures trustee. Registered with SEBI.

Covered Bond

Now the 25cr home loan (market value 100cr) asset of NBFC is booked for SPV. From there Wint Wealth will take 20cr Bond. After that, it will be sell in the secondary market. If in case credit rating of NBFC starts getting down. SPV will start selling the loan to recover money. Moreover, if in case the borrower couldn’t pay the EMI. SPV will sell the house. Indeed if case NBFC got to fail to return. Then Wint Wealth also has the right to pick up the nice-nice loan and sell. In Covered Bond, there will be a simple and short process. Rating will be determined by SPV. if the rating gets down. Then their bad days started. So that’s why Covered Bond is called bankruptcy remote. It is a fully safe and secure option to get a Fixed Income.

Where To Invest Covered Bond To Get Fixed Income

Wint Wealth is one of the best platforms for Cover Bond. The investment for a covered bond is a minimum of Rs.10,000. The maturity of the bond is 18 months. Try to invest a minimum amount of money as wish. Don’t put all the eggs in one basket. Always believe in diversifying your asset. Invest 1/5 of your investment. Start your covered bond journey with a small amount.

One negative fact is that before maturity. If you want to sell your bond. Then you need to sell only on the Wint Wealth website. If they find any buyers, they will match with you. Either liquidate the bond is quite difficult before maturity.

Taxation

Covered Bond has merit as an MLD (Market Linked Debenture). If the Sensex will be up above ~10,000. Then you will get principal with coupon. If the Sensex is below 10,000 after 18 months. Then you will get only the principal amount.

As the covered bond is linked with the stock market. That’s why debenture is treated as an equity instrument. For taxation purposes. As of holding for 18 months, it comes under LTCG. If your holding is more than 12 months. You are taxed 10% on interest. Indeed, if your holding is less than 12 months. You are taxed as per the income slab. So finally, we can say that a covered bond is a tax-effective instrument. Especially it is beneficial for investors in the 30% tax slab.

Conclusion

To fulfill all the dreams in your life, need to be financially secure. You need to create recurring revenue. So that every month, money comes into your pocket as a Fixed Income. Covered Bonds are one of the options as compared to FD. It can give fixed returns always. Covered Bond is also called bankruptcy remote. It is tax-effective. Overall, we can say it is one of the safest and secure bonds.