In India, you can come across multiple investment opportunities. Out of all, the bond is an effective debt instrument in which the issuer borrows the amount from the lender (the bond holder). In return, the issuer is obliged to pay interest on the principal amount. This interest is referred to as the coupon.
In the finance world, both bonds and stocks are regarded as capital market securities. Still, the difference lies in the fact that the stakeholders have an equity stake in the company. On the other hand, the bondholder has a creditor stake in the company.
Multiple financial institutions and government bodies issue bonds to raise funds for ample financing to meet current expenditure needs or for future investments. While there are multiple investment opportunities in India, different types of bonds are regarded as relatively safer due to the overall low risk involved.
What is a Bond? What are Its Types?
Bond is a leading financial investment opportunity in India. Bonds are also referred to as fixed income instruments and are used by companies or government organizations to raise money by borrowing from potential investors. Typically, bonds are used to raise funds for particular projects. In return, the issuer of the bond will promise to pay back the investment, in the form of interest, over a specific period of time.
Specific types of bonds, like government and corporate bonds, are considered by credit agencies as reliable when it comes to determining the quality of the respective bonds. They are given special ratings that are used to assess the chances that investors will be repaid.
Some of the common types of bonds are:
- Corporate Bonds: These are debt instruments issued by an organization to raise funds for initiatives like development, research, and expansion. The interest out of corporate bonds is taxable. Still, corporate bonds offer higher yields in comparison to other types.
- Municipal Bonds: These are issued by a city, state, or town to fund specific projects that do not produce income. These projects could include the development of parks or playgrounds. In comparison to corporate bonds, the interest earned on municipal bonds is tax-free.
- Government Securities: These are the bonds issued by the State and Central Governments. As they are issued by the government, there is no risk involved. Therefore, these are the safest investment opportunities out there. These bonds pay interest on a semi-annual basis.
- Capital Gain Bonds: These are financial instruments that enable you to transfer gains from long-term assets, including a house or a property into particular bonds.
- Inflation-linked Bonds: In this type of bond, both the interest payments and the principal amount are linked to inflation. These bonds are an effective way for nations to control inflation.
- Sovereign Gold Bonds: The Government of India also issues Sovereign Gold Bonds. These bonds serve as a form of security, usually in the form of a Government of India stock. It also comes with an interest rate that is paid regularly while boasting a zero risk of handling, like in the case of physical gold.
Is It Difficult to Invest in Bonds?
While you can come across several investment opportunities in India, shares and bonds are the most sought-after asset types. Investing in bonds can be achieved through both the primary and secondary markets. In the case of a primary market, you are expected to subscribe to the public issue of major companies. On the other hand, you can buy bonds from the secondary market that are being traded on exchanges.
Typically, bonds are regarded as illiquid as they are kept till maturity. Still, if you need to exit the investment prematurely, you can consider selling them on the secondary market.
When it comes to investing in a bond, the holder remains dependent on the issuer to get back the money that has been lent out. Therefore, it is important to check the creditworthiness of the issuer.
If you are buying bonds, you should purchase them from a reputable issuer. One way to ensure the same is by going through their credit rating.
Returns from Investing in Bonds
Bonds carry an interest rate or coupon. This coupon is typically payable annually. It is defined as the percentage of the face value of the bond. The bond’s interest rate is defined at the moment when the company or the Government issues the bond.
When you go ahead with buying a bond in India from the primary market, it is usually issued at face value. The return remains the same as the interest rate or the coupon. However, in case you purchased in the secondary market, the return can be a little higher or lower than the interest rate. This will ultimately depend on the price being higher or lower than the face value. This return is defined by a parameter known as the YTM or Yield to Maturity.
Can You Diversify?
It is recommended to consider diversification when you wish to put your funds in different investment options in India. This is the same case while buying bonds. You can think of investing in different types of bonds to eliminate or reduce non-systemic risks. Some ways of ensuring diversification are:
- Investing in bonds of diverse qualities
- With different maturity dates
- Debt mutual funds
- Geographically diverse bonds
Conclusion
You can consider investing in different types of bonds to diversify your investment portfolio and generate a steady income. You can choose between government, corporate, and municipal bonds while understanding their risks and benefits. You should choose bonds carefully to align with your financial goals and risk tolerance.
