All you need to know about investing in bonds
August 24, 2021
Many people are keen on investing in the stock market, but the risks and fluctuations that accompany these markets, not just in India but abroad as well, deter them. For people with a conservative outlook on investments and risks, there is an option to invest in bonds in India.
Bonds are debt market instruments, using which, the lender provides funds to the bond issuer. The bond issuer promises to pay back the amount borrowed at the end of the bond period, along with the interest paid at regular intervals. The bond issuer can be a private or a public sector company, a bank, a non-banking financial company or a Government. The said entity promises to repay the entire sum raised, at the expiry of the bond period, along with interest payment at regular intervals.
The interest that the issuer pays to the lender is called a coupon. The total amount invested in a bond is called the bond price. One can calculate a bond yield by dividing the coupon amount you receive as interest on the bond, by the bond price. A bond yield is essentially the total returns you earn on a bond.
In a way, both bonds and shares are capital market securities, with a key difference that bonds put the lender in the position of a creditor to the company and a share puts the investor in the position of a shareholder.
Businesses and Governments issue bonds to meet their long-term needs and to bridge their current expenditure shortcomings. People invest in bonds, because they are considered to be safer, when compared to shares and other securities.
Types of bonds in India.
- Government bonds:
Government securities that mature in less than a year are called T-bills, and those securities whose maturity period is over a year, are called bonds. Government bonds are issued by the Central and State Governments, as well as the municipalities. These bonds are considered to be the safest investment, considering that the Government can print money and repay the borrowers, any time it deems fit.
- Corporate Bonds:
Corporate bonds are bonds issued by companies and corporates of different sizes and standing. Corporate Bonds are issued by companies to meet their capital needs. Investors who invest in these funds receive regular interest payments and repayment of their bond price, at the expiry of the bond tenure. Corporate Bonds offer better returns than Fixed Deposits and Savings Account. However, some Corporate Bonds are known to sink, so investors are advised to perform their due diligence before investing.
- Sovereign gold bond:
These Gold Bonds are issued by the Government of India and are a great alternative to buying physical gold. The investor gets an opportunity to increase his wealth by investing in these bonds and at the same time receives interest on the amount invested. In case the bonds are held till maturity, the bondholder is exempted from payment of capital gains tax, as well.
Sovereign gold bonds are issued for a tenure of eight years and give an option to the investor to exit from the fifth year onwards. When an investor pools his money into the funds, he receives a holding certificate as proof, that funds have indeed been channelled into the bonds. These funds have proven to be highly popular in India, as carrying physical gold has its own risk and many people are keen on capturing the premium from the rise of gold in India, without holding it physically.
- Convertible bonds:
These are special types of bonds that allow the conversion of the bond amount into equity, on terms that are pre-determined.
- RBI Bonds:
Recently, in 2018, the bank regulator decided to issue 7.75% taxable bonds in India, to permit HUF/residential citizens to invest in a safe and secure bonds, without any monetary ceiling.
How does one invest in bonds in India?
For those keen on investing in bonds in India, ICICI Bank gives them a great opportunity to invest in India’s most trusted Corporate and Government bonds with ease, and at the click of a button. Investors can choose from a wide range of Corporate Bonds with attractive returns and different tenures. These bonds are considered safe investment havens, and have been rated AAA by credit rating agencies, indicating that these bonds have been issued by reliable, trustworthy companies, with extremely low or no risk of default.
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