Why Are Senior Secured Bonds Preferred By Risk-Averse Investors ?
Traditional investment options like fixed deposits and the stock market are no longer the only ways to grow your wealth. With market volatility on the rise, investors are exploring alternative investment avenues for better risk-adjusted returns. One such option is corporate bonds, offering higher returns than FDs with lower risk than equities. However, they are not entirely risk-free, making it crucial to consider risk management strategies.
This is where senior secured bonds come in—these low-risk, collateral-backed instruments provide greater stability, predictable returns, and a higher recovery rate in case of default, making them a reliable choice for cautious investors. Keep reading to discover why senior secured bonds might be the perfect addition to your portfolio.
What Are Senior Secured Bonds?
Senior secured bonds are low-risk debt securities issued by governments or corporations to raise capital while ensuring investor protection. These bonds are backed by specific collateral assets such as real estate, cash, or other valuable holdings, reducing default risk.
Their priority ranking over unsecured or subordinated bonds ensures investors receive payments first in case of liquidation. This makes senior secured bonds an ideal choice for risk-averse investors seeking capital preservation, steady income, and effective risk management.
A. Difference Between, Senior Secured, Unsecured And Subordinated Bonds
Understanding the differences between senior secured bonds, unsecured bonds, and subordinated bonds is crucial for making informed investment decisions. The table below highlights their key distinctions:
Basis | Senior Secured Bond | Unsecured Bond | Subordinated Bonds |
Collateral | Backed by assets like real estate or machinery | No specific collateral | No collateral, repaid after senior debts |
Risk level | Low risk due to asset backing | Higher risk, as it depends on the issuer’s creditworthiness | Highest risk, repaid last in liquidation |
Interest rate | Lower rates due to lower risk. | Moderate, based on the issuer's credit rating. | Higher to compensate for increased risk. |
Repayment priority | Paid first in case of default | Lower priority than secured bonds | Paid only after senior debts are settled |
Also Read: Key Difference Between Secured And Unsecured Bonds
B. Role Of Collateral And Security In Protecting Investors
Collaterals serve as safety nets in case of any default for an investor. They give bondholders a direct claim on the same assets, allowing them to recover their investment by seizing and liquidating the collateral. Thus, such an assurance of repayment provided by senior secured bonds significantly reduces the risk associated with its investment.
Stability And Predictable Returns
Senior secured bonds in India are low-risk investments as they have high credit ratings and offer security. These bonds provide a fixed return to investors, which is one of the attractive features of such investments. Moreover, they are backed by collateral, thus further offering a layer of security for investors.
In case of default, senior secured bondholders have a higher priority claim on the company's assets than unsecured or subordinated debt holders. This helps reduce the risk of loss, thereby making the investment stable. Let’s discuss further on this below:
1. Fixed-Income Nature Of Bonds
Senior secured bonds are a type of fixed-income investment that provides you with regular interest payments and the return of the principal amount at maturity. With the presence of collaterals, this structure provides a predictable income stream and reduces investment risk.
2. Lower Volatility Compared To Stocks And Mutual Funds
Senior secured funds have lower volatility than stocks and mutual funds due to their priority in repayment, collateral backing, reduced sensitivity to market fluctuation, income generation, and diversification. These factors combined make it a more stable investment avenue.
3. Why Risk-Averse Investors Prefer Stability
Risk-averse investors prioritise capital safety and prefer stable, predictable returns over high-risk, high-reward options. This approach aligns with their goals and minimises the potential for financial loss.
Lower Risk Due To Collateral Backing
Senior secured debts like bonds and loans often involve the indebted entity providing assets as collateral; this collateral acts as a security for the lender. Here is how it works:
Why Collateral Reduces Default Risk?
If a company fails to repay its senior secured bondholder and declares bankruptcy, such a default is settled by liquidating the collateral against the bond. Some of the ways it benefits these bondholders specifically are:
1. Lenders and investors get priority over other creditors.
2. Reduces the risk of losing the investment entirely.
Diversification And Portfolio Stability
Secured corporate bond funds have the ability to invest in a variety of secured bonds. This reduces the chance of loss by spreading out the risk. For example, investing in different industries also covers the losses either one struggles, ensuring the overall portfolio maintains its profitability. This makes the fund more stable and less likely to change, thereby providing stability.
1. Significance Of Diversification
Diversification is key to managing risk, no matter if it is about senior secured bonds. A mix of bonds, stocks, and other assets helps reduce overall risk and ensures steady returns. By investing in a variety of bonds, you spread your risk across different industries and companies. This means if one company struggles, it would not drastically impact your entire investment.
2. How Senior Secured Bonds Reduce Portfolio Risk
Senior secured bond funds reduce portfolio risk by offering asset-backed security and priority repayment in case of issuer default. Their lower default risk compared to unsecured bonds enhances portfolio stability. With predictable returns and lower volatility, they provide a safer fixed-income option, balancing risk in diversified investment portfolios.
Industries That Commonly Issue Secured Bonds
Many industries issue senior secured bonds to raise funds while ensuring investor safety. Some examples include:
1. Real estate companies use the property as collateral.
2. Infrastructure firms use assets like roads and bridges.
3. Energy companies use power plants or natural resources.
4. Manufacturing firms use machinery and equipment.
Senior Secured Bonds Available On Grip Invest
Grip provides access to a range of fixed-income investment options, including some of the top-secured bonds in India. Here are a few of the secured bonds available on the platform:
- Navi Finserv Senior Secured Bond
- InCred Senior Secured Bond
- Indel Senior Secured Bond
- KB NBFC Senior Secured Bond
- U Gro Capital Senior Secured Bond
- Keertana Senior Secured Bond
To invest in these Senior Secured Bonds, simply register on Grip and complete your KYC.
Conclusion
Senior secured bonds offer stability, security, and predictable returns, making them ideal for risk-averse investors. Their collateral backing and priority repayment reduce risk, providing a safer alternative to stocks. While no investment is entirely risk-free, these bonds can help diversify and balance your portfolio effectively.
Log in to Grip Invest today to start investing in senior secured bonds. It is a user-friendly platform that allows you to start investing with as little as INR 1,000. You can earn fixed returns of up to 14%.
Frequently Asked Questions On Risk Management Through Senior Secured Bonds
1. Are senior-secured bonds safe?
Senior secured bonds are considered to be less risky than unsecured bonds or stocks due to collateral backing and repayment priority. However, they are not risk-free. Factors like senior secured bonds' interest rate changes and economic downturns can still impact their value.
2. What are senior debentures?
Senior debentures are often confused with "senior bonds" but actually represent a type of debt that ranks above other unsecured debt in the event of bankruptcy. They generally do not carry collateral, whereas secured bonds are collateralised. However, seniority gives them a higher claim on assets.
3. What is the difference between a senior bond and a junior bond?
Senior bonds have a higher claim on a company's assets than junior bonds (also called subordinated bonds) in the event of bankruptcy. Senior bondholders are paid first, making them less risky, while junior bondholders are paid only after senior claims are met. Junior bonds typically offer higher interest rates to compensate for the increased risk.
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Disclaimer - Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading.
This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for consequences of any actions taken based on the information provided. For more details, please visit www.gripinvest.in
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