What are debt investments?

Debt Investments

Investment made in a firm or project through the purchase of a large quantity of debt is called debt investment.

Keep reading to understand better.

Businesses, organisations and governments need loans for development and expansion.
To meet their need for capital, they can ask for a loan from you in the form of debt investments or bonds.
Just like for any other loan, bonds are of a pre-specified maturity period. For this period, you earn interest. After the maturity period, you get back your principal (amount invested).
Your interest or returns may or may not be added to your principal amount in debt investment.

The interest rate or the returns earned on your debt investment is called the coupon.

Yield is the total returns you get by investing in bonds.

For example:

Suppose you have invested ₹1000 in a bond, and your coupon (interest rate) is 10%.

Here, your bond yield will be 10% on ₹1000, which is ₹100/-

Below is a list of things to look at while investing in bonds.

It is just like a credit score for companies and organisations
These ratings determine how capable the company can repay your principal amount and interest
There are credit rating companies that analyse the financial strength of the business and provide ratings
Generally, the credit ratings of government bonds are greater than those of corporate bonds
The higher the credit rating, the lower the risk on your principal

Never invest all your saved money in debt investments
Debt investments have a maturity period and may have a penalty for withdrawing before maturity
Keep adequate money aside for emergencies and then invest in debt

Be careful about investing in debt investments that do not have a purpose and offer higher returns or money by inviting more people to the scheme. These are Ponzi schemes.
Read more about Ponzi schemes in our guide.