What are Bonds? And How to Invest in them in India?
A bond is a financial product which represents some debt. It is a debt security issued by an authorized issuer which can be a company, financial institution, or Government. The issuers offer returns on bonds to the lenders in the form of fixed payment of interest for the money borrowed from them.
A bond is having a fixed maturity period of its own. It is an obligation of the authorized issuer in paying interest and/or repaying the principal at a future date upon maturity. However, such payouts are dependent on the terms and conditions associated with the bonds issued by the said issuer.
Are bonds and stocks the same?
It was stated earlier that bonds are as good as debts. So, if you are a bondholder, it means that you are a lender of funds to the issuer entity. On the other hand, if you own a stock, it indicates that you have a share in the ownership of such issuer organization.
Bonds are having predefined maturity periods while stocks don’t. Anyways, if you invest in stocks, you can sell them off any day. But, if you are a holder of bonds, you have to wait for its maturity period to end to get back your investments.
What are the different types of bonds available for investing?
- Zero-coupon bonds: These bonds are available for investing at a discount on the face values. After the expiry of their maturity period, they are redeemed at par.
- G-Sec bonds: These bonds are considered as one of the safest bonds as they are issued by the Government of India.
- Corporate bonds: These bonds are issued by corporate The companies borrow funds from the people and pay them regular interests.
- Inflation-linked bonds: The principal amounts and interest payments of these bonds are indexed to inflation.
- Convertible bonds: A bondholder is having the option of converting these bonds into equities as per predetermined terms.
- Sovereign gold bonds: These bonds are issued by the Indian Government and offer the safest way of investing in digital Gold.
Why would you invest in bonds?
Here are a few best reasons why one should invest in bonds:
- Bonds are less riskier than equities. Therefore, investing in bonds will ensure that your corpus is protected.
- It is highly likely that the returns on equities are higher than bonds. But, this is also to be considered that investment in equities carries a higher risk than bonds. The payment of interests on bonds is ideally assured while equities don’t make any such promise of paying regular dividends.
- If you don’t want to pay tax at all then you can invest in tax-free investment bonds. So, if you fall in the higher tax bracket, not only you keep on growing your wealth but also enjoy full tax advantage on the returns on such bonds.
(Source & Image credits: Karvy)
How to Invest in Bonds in India?
If you want to invest in Bonds in India, either you would be investing in corporate bonds or Government bonds. Let’s first talk about investing in corporate bonds.
You can buy Corporate bonds from the primary markets when the issuing company issues new bonds. In order to invest in them, you are required to file an application form and submit the same to any branch of the issuer along with prescribed documents and application fee. In case you are having Demat Account, your bonds will be credited to the same. However, if you don’t have one, then you would receive them in their physical format. You can also buy corporate bonds from the secondary markets subject to their availability.
Government bonds are not traded like shares on the stock exchange or secondary market. They are sold through their official distributors. These bonds are also made available by the designated branches of post offices and banks. For investing in these bonds, you can submit your application form, necessary documents, and required fees in any of the said places. Once your application is processed, you would receive bonds in your name.
Instead of buying bonds directly from the companies and Government, you can also invest in them through the bond brokers in India. Investing in bonds through brokers is more convenient. You can invest in bonds through their online platforms like websites and mobile applications. Brokers like ICICI direct, HDFC Securities etc offer their clients to invest in bonds along with equities. Here, to comply with KYC requirements, you are not required to pay any visit to their physical offices. They are the investment service providers and act as middlemen between you and the issuer organizations.
The bond brokers are the market makers of bonds in India. Over 90% of the bonds which are traded in India are privately placed instruments. Therefore, they are not advertised at all. The bond brokers are playing an important role in creating a deep and wide bond market in our country.
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In India, the majority of the people are interested in investing their money in their Bank Fixed Deposit Accounts. The next preferred investment options are the tax saving instruments like NSC and PPF. Financial literacy is not at all strong in our country. Therefore, most people are unaware of the fact that diverse investment options are available. A good number of Indians simply feel afraid to invest because of the lack of proper financial education.
The bond market in India is not as deep as what exists in western countries. Therefore, the number of individual investors in the Indian bond market is pretty low. Due to AMFI, Mutual Funds have started gaining substantial popularity in the last few years in India. So, the retail investors have started investing in bonds not directly but through debt mutual funds.
The investors in the Indian bond market majorly consist of Banks and Financial Institutions. Advertising is not permitted in India with regard to investing in bonds. If any authority takes the initiative to encourage bond investing, then India can witness a more liquid bond market someday.