Earn upto 10% Fixed Returns in Bonds @Low Risk | Credit Ratings | Bonds Investing #3 - YouTube

Friends! you are very welcome in the one more video of bonds investing series.

In the first video of this series, we've covered all the basics of the bonds in detail.

You must remember that we had talked about that bonds are a very good option for investment diversification.

Because you see, when we invest in the bonds then what is our main objective?

We want to earn more returns than the FD,

or if we find the stock market riskier then we want to reduce our risk.

And here we want to earn better-fixed returns by taking less risk.

In that video we had seen how do we invest in bonds?

For which we had talked about the GoldenPi platform. The link to which I have provided you in the description below.

but after that video, we get a lot of comments that,

On the platform, we are getting many kinds of bonds,

we are getting returns of 5-5.5% also,

and also we are getting returns of 13-14%.

So how do we select between these bonds which bond will be best for us?

So see there is one very simple rule,

as the risk increases, the company or the organization has to promise you more returns.

So which is our objective about which we talked earlier,

that in what way we reduce our risk?

Along with this, without taking much risk we can earn 8-10% returns quite easily.

We are going to talk about this in this video.

Namaskar! my name is Mukul, you are watching Asset Yogi.

The video is going to be interesting, stay tuned.

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So friend if we want to analyze any bond then the question arises how do we do that?

See in this we can study the 3 main parameters and they are not so tough but quite easy.

So the first parameter is that we see its credit rating.

Now if I tell you its example,

like when we go to watch a movie or

even if we are watching any movie online also

then first of all we check its rating on IMDB,

that whether we invest 2-3 hours in that or not?

Second, if we buy anything from Amazon, Flipkart then also we check its rating.

Similarly, if we are interested to invest in any bond

our hard-earned money then we must check its rating.

So this credit rating,

any kind of a credit product is there,

what is the meaning of credit?

Any financial instrument created in the form of loan,

then we call it credit.

If it is getting a rating,

now you see this rating can be given of country also

because countries also take loans from other countries.

So there is the rating of a country also,

maybe of an organization or non-profit organization

a financial product of any organization which is being created also has a credit rating.

So whichever agency is giving this rating to any product

it checks

whichever organization is issuing it, first of all, the creditworthiness of that is checked.

Whether this organization has that much potential or not

that, whether this can repay its loans or not?

Then second, what kind of bond is being issued? whatever that financial instrument is,

What is the quality of that?

So this we understand in short what is credit rating is.

Now what is its importance and why do we need it?

So first we talk about the borrower company that how does it get benefited because of a good credit rating?

See when the rating is good then obviously the investors will have more interest

so its funds will easily raise.

This is the first benefit.

Second, if it is getting a good rating then it has to promise low interest to the investors.

So here also it gets benefited.

Now on the other hand, if we talk about the investors,

so if they find a good credit rating of any product,

then they feel my risk is getting reduced here,

and this helps them in making a sound financial decision.

Let's talk about how does this credit rating works?

See the credit rating agency mainly analyzes the risks of three types of any company or product.

The first one is financial risk,

means what is the company's financial position, can it

whether it can do the repayment easily or not?

The second is business risk,

business risk means in which environment the company is working, whichever kind of economy it is,

is there any danger for its business?

this thing gets studied.

The third is credit risk,

whichever money it is taking from the market,

what is the quality of the bond or product

what is its kind? whether it is secured or unsecured?

People's money will be protected or not?

And can the company will be able to pay the interest or principal easily which is promising?

Now how the credit rating agency analyzes all these risks?

Firstly, it sees the financial statements, studies all the financials of that company.

Second, it also looks on the past records, if they have taken any kind of loans in the past

or issued the bonds, then whether they had paid them timely or not?

Then they are raising this new debt meaning bringing the new bond,

which kind of bond it is? studies that.

Along with this, also looks that whether it can it will be able to repay easily or not?

So this is we understood how do credit rating works and its mechanics.

Now we talk about which kind of credit rating agencies are there in India?

Here we have the top four rating agencies,

so we have here Crisil Limited, ICRA, CARE, and India Ratings & Research.

You'll see whenever you want to invest in gold even if you are investing through GoldenPi

then you'll see there at least one rating

and there will be mentioned which rating agencies have given those ratings.

Now quickly let us understand what kind of ratings are given and what is their exact meaning of them?

You'll see here you are getting to see the ratings from AAA to D,

AAA is the highest-rated product in which the risk is minimum.

You'll see in the tax-free bonds, government securities in which you've almost 100% security

those are rated as AAA.

So the risk is lowest but definitely, here your return also gets a bit reduced.

On today's date, you get 5, 6, 7% of returns.

So this is our prime grade.

All these are investment grades.

And you are seeing here marked by green color,

all these ratings are investment grades means

above the BBB all the ratings are investment grade.

So below the AAA comes AA and then comes A.

Then comes BBB, BB, B, CCC

as our risk increases

in this way, our rating keeps on decreasing.

And finally, if any company defaulted its repayment of bonds

then we call it In Default.

And you are seeing this is marked by orange color, these are non-investment grade bonds.

Or sometimes we call them high yield bonds or junk bonds.

So our objective should be this only that we

consider BBB or above-rated ing bonds to investment.

It is possible many places you get to see this high yield bonds

but we should be aware that our risk is increasing in that.

So at number one, we will invest only in these bonds,

and in that also we'll try that

we invest in only A, AA, AAA.

And you see if we invest in AA or A then the balance is created between the risk here,

here we get 8-10% returns and our risk also does not get very high.

So it is the rating at a broad level.

In this, you see other variations also

If it is a bit above AA then you see this sign of + also,

if it is a bit low than AA then you'll see this sign of - (minus)

Similarly, you see any rating

if it is slightly above BBB then you'll see a sign of +

if it is slightly below then you'll see a sign of -

And about whatever rating agencies I've talked to you

be it CRISIL, ICRA, CARE

they put their name before but the nomenclature of the rating is the same.

So we've understood the concept of credit rating,

now the question comes how much these ratings are reliable, how much belief in them can we do?

Because we've seen many times in the past

that many financial instruments have given good ratings and still they did default.

We see the two classic examples of this

in the first example, I talk about the subprime crisis in the US in 2008,

there, mortgage-backed securities were given the AAA ratings

though in actuality it was junk securities.

Because of that, quite a big crisis came and a recession came in whole the world.

Second, if we see the case in India also,

IL&FS Transportation Networks company also has issued the bonds

they were also given AAA ratings

though they've defaulted on some of their payments still they got AAA ratings.

So we all know how many problems occurred in the market due to the IL&FS crisis,

there was some problem in NBFCs, some debt mutual funds also defaulted.

And because of this SEBI charged ICRA and CARE with a fine because they've given wrong ratings.

So definitely, we've got to see such examples also

but also the system keeps on improving by all these.

So it is not like we completely leave the ratings

we definitely can take a cue from there.

We can definitely take a hint from there that what kind of a bond it is

After that we can do our basic checks on our own also

See if we check 2-3 parameters

of a company then also we can ensure our security on our own.

So we can see what is the position of any company?

See we even know at a broad level that if a brand is very good if it is performing good financially

so definitely it would easily do the repayment of its debt.

Here we can also check its debt-equity ratio.

This means how much its net-worth is as compared with debt?

if its debt-equity ratio is less than one that means its financial position is fair.

Along with this, we can also check its profits also that whichever profits it is earning whether it will easily pay its EMI or not?

And what is this EMI, at the end it is our bond repayment only.

So as we take loan and EMI

repayment's capacity do we have or not

the bank checks for sure

the same thing we need to check for a company that will it be able to pay its EMI or not?

Will it be able to return our money to us or not?

Along with this, we can check its past records also

simply type in google

XYZ company defaults?

If you get such kinds of articles about default then you can be away from that company.

Third, we can do one more work, we can analyze the bonds in a bit depth.

For example, if you are investing through the GoldenPi then you can put a filter also out there.

You can see secured, unsecured also.

If security is kept against a bond that means your chances become better and your risk is further reduced.

Second, we can its seniority also, if it is a senior bond that means,

if by chance that company defaults

then the meaning of the senior debt is which

the first charge will be with those investors who have that senior debt.

Second, the subordinate debt

if the company gets bankrupt by chance

then when all the payments are done of senior debt

and if some money remains after the auction of the company, then this money goes to the people with subordinate bonds.

So we can do these 2-3 checks.

But according to me, first of all, if we do check the ratings properly

and along with this sees the financial position at a broad level

I think we are good to go.

So I understand if we do these 2-3 checks

then we can easily earn returns of 8-10%

especially when we are talking about A-rated or AA-rated bonds.

So here we get decent returns and our risks also get reduced to quite an extent.

So I hope you liked this video and you got something new learning in this.

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