Bonds

A bond is a financial instrument generating fixed income, helping you secure your financial well-being for the future. In simple words, this debt security can be considered a written acknowledgment of debt between the borrower and lender. 

 

The bond market in India is a popular and growing market, giving investors the opportunity to generate fixed income from their idle funds/savings. However, before opting for bonds investment in India, you need to be well-versed with what bonds entail, its features, benefits, types, and more. 

 

Read on to learn more about investing in bonds in India and what they actually mean. 

Certain companies, corporations or governments make bonds available in India, i.e., issue them when they need funding for their capital requirements. When you buy bonds, you pay a certain amount (face value) to the entity for a defined tenor. They will give you interest till the end of the tenor along with your principal (face value). In technical terms, bonds are debt instruments that give you a fixed income till its tenor. Corporates, governments, and other sovereign entities can issue these instruments to raise funds. 

 

Given that it is a debt instrument, you can trade in bonds just like other tools. There are numerous bond investment platforms in India for you to trade or invest in. Moreover, the bond market is less volatile as compared to the equity market, making it a comparatively low-risk instrument as compared to stock. 

Here are some of the must-know bond features:

• Debt instruments offer fixed income for a certain period (tenor)

• Interest rates on bonds can be fixed or floating, depending on the issuing entity

• Bonds come with a credit rating, giving an idea about the creditworthiness of the issuer.

• In case of bankruptcy, bondholders receive debt payments before stockholders

• Bonds come with a fixed maturity date, after which the issuer repays the principal

• The bonds market has low volatility and allows you to diversify your portfolio

There’s a huge list of bonds in India, some of which include:

• Corporate Bonds

When corporate entities, public or private, issue bonds, they are termed as corporate bonds. They generally have high interest rates and are generally medium to long term.

• Convertible Bonds

As the name suggests, you can convert your bonds into equity (shares) of the issuing entity during the tenor at specified times.

• Zero-Coupon Bonds

These do not have returns in the form of interest. Instead, the return is the difference between your principal (face value) and redemption value.

• Perpetual Bonds

These come without a fixed tenor, and as such, you will not receive your principal amount. However, the issuer will ‘perpetually’ pay interest to you.

• Green Bonds

These bonds are specifically to support climate specific bonds, and therefore, the funds raised are put towards projects that have a positive impact on the environment.

• Tax-Free Bonds

Issued by public undertakings, your returns from these are exempt from taxation.

• PSU Bonds

Public Sector Undertaking Bonds commonly known as PSU Bonds, are issued by corporations where the government holds more than 51% shares.

• Government Bonds

An umbrella term for bonds issued by the State or Central government. As such, the risk in these is comparatively lower.

There are numerous advantages of bonds, but they also have some drawbacks. Here are some pros and cons you should know.

Pros

• Fixed interest income till maturity with low risk

• High liquidity as compared to Fixed deposits as they can be traded in a secondary market

• Increased safety and security due to government or collateral backing

Cons

• Devaluation risk if the inflation rate exceeds the coupon rate

• Low returns in comparison to some debt and equity instruments

• There is a liquidity risk if the investor is not able to sell the bonds quickly due to a thin market with few buyers and sellers.

• The bonds also have credit risk which means that there is a probability of loss which may arise due to the issuer’s inability to pay.

Before you choose from the plethora of bonds to buy in India, consider the following factors to make an informed decision.

• Assess your risk appetite and goal, bonds are ideal for low-risk and fixed income goals

• Check the interest pay-out (fixed or floating) to ensure returns align with your needs

• Evaluate whether it is secured or unsecured to know what will happen in case of default

• Consider the term and liquidity to ensure you can maximize your returns 

 

Remember to invest smartly. Consider the above factors to get the most from your investment. Also, be sure to diversify your investment portfolio. 

 

You can buy bonds from either the primary market or the secondary market. In the former, the bonds are available directly from the issuing entity (corporate, government, etc.). Bonds in the secondary market, however, are ones that are already purchased by another investor, who is now selling them. 

 

In simple terms, the secondary bond market is where the issuing entity has no role to play. Only investors/traders buy or sell these instruments. However, the secondary bond market in India is evolving. 

 

Doing this allows you to mitigate the risk and ensure the security of your investments. On bajajfinservmarkets.in, you can invest in numerous options, including some of the top bonds to invest in India. With an end-to-end digital process, you seamlessly secure your finances right away.

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