Investing in bonds in India – How smart is it?

Bonds are a go-to investment option for both beginner and expert traders in India. By definition, a bond is a debt instrument where an issuer company borrows a certain amount of money from the bondholder (the lender) in return for a certain interest on the principal amount. This interest is also called a coupon.

 

While investing in a bond, the lender or the bondholder signs a formal agreement where the borrowing company promises to pay the borrowed money along with the pre-decided interest on a quarterly, annual, or monthly basis.

 

The main difference between investing in bonds and stocks is that the stockholders will have an equity stake in the company, but the bondholder will have a creditor stake in the institution. Simply put, if you own a stock, you enjoy the status of being the owner of a company. On the other hand, if you invest in stocks, you will just be a lender for the company.

Why invest in bonds in India?

Now coming back to the main question of the day, investing in bonds is an excellent way to diversify or hedge your fixed-income portfolio. So if you want to play safe or have a low-risk tolerance, investing in bonds is the best choice.

 

Also, if you are a beginner, we recommend you invest in bonds as you can easily predict the income, and it will also preserve your capital.

 

Here are some of the advantages of investing in bonds in India:

 

  • Investing in bonds will help diversify your portfolio.

You should not keep all the eggs in one basket. 

 

This is a well-known principle. So, adding bonds to your portfolio will help you achieve this. With diversification, you can easily reduce the risks if the other investments do not provide good returns.

 

  • Assured Returns

Investing in bonds is beneficial compared to other financial instruments as they offer assured returns. This is irrespective of market fluctuations.

 

  • Formal Contract

When you invest in bonds, you get into a contract with the issuing company. This is a formal process, and as per the contract, the issuing company has to pay the interest and the principal amount within fixed intervals.

 

Also, did you know that you will get priority for debt repayment if the issuing company goes bankrupt? Yes, you heard it right; this is why investing in bonds is considered almost risk-free.

Important things to know before investing in bonds in India

Here is the list of the things that you should remember while investing in bonds:

 

  • Maturity period

The maturity period is when the issuing company is supposed to pay back the bondholder’s principal amount and interest. The maturity period depends on your financial goals; it can be short-term, 1-5 years, or long-term, which is more than 12 years.

 

  • Tax Factor

Income from any financial assets is taxable. However, certain bonds like green bonds and income and capital gain in a few government and municipality bonds can help you get tax discounts.

 

  • Types of bonds

There are two categories of bonds, secured and unsecured. A secured bond is a type of investment secured by an asset owned by the issuing company. You will get ownership of all the assets if the issuing company cannot repay the money.

 

An unsecured bond, on the other hand, is not backed by any collateral. These bonds are much riskier compared to secured bonds.

 

  • Coupon Rate

Remember we discussed coupon rates a couple of paragraphs before? So before investing in a bond, you also need to ensure that the coupon rate is high enough.

 

  • Callability

Did you know that certain bonds also offer “callable” features besides tax benefits? A new term, isn’t it? (We are only talking about new traders)

 

If a bond comes with callable features, the insurance company can pay off the principal amount before the maturity date. In such a case, interest rates are much higher, which is why many traders prefer investing in such bonds.

Steps to buying bonds in India

Here’s how you invest in bonds in India: 

  • Corporate Bonds

Companies issue corporate Bonds to raise capital. First, it is issued in the primary market and then shifted to the secondary market, where you can directly buy it. If you plan to invest in a corporate bond, research the company thoroughly and learn about its fundamentals.

 

To invest in a corporate bond, the only thing that you require is a Demat account. Using this account, you can purchase or sell a bond.

 

  • Municipal Bonds

The SEBI monitors municipal bonds, and you can buy them from primary and secondary markets with the help of bond dealers and banks.

 

Conclusion

Most investors prefer investing in bonds over other financial assets in India as they are safer and offer a steady source of income. This is why all risk-averse investors invest a certain amount of money in bonds to protect themselves from sudden changes in the market.

 

Are you planning to invest in bonds but don’t know what to do? Don’t worry; we at MoneyIsle have experts who can help you with your investment.

FAQs

1. Are bonds better than gold?

Investing in government bonds is much safer than gold as they pay higher rates whenever there is a rise in inflation.

 

2. Can you lose money on a bond investment?

Even though there is a slight risk with investing in bonds, it is considered safer than other types of investment as there is a regular income.

 

3. What are the best Indian bonds to invest in?

The top long-term bonds are Tata Income Fund Direct-Growth, UTI Bond Fund Direct-Growth, or Nippon India Income Fund (Growth)

 

4. What is the minimum amount to invest in bonds in India?

In India, you can start investing in bonds at a mere cost of Rs 1000. However, there is no end limit.

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