A prudent and wise investor makes well-informed investment decisions when investing in bonds, it is important to understand the terminology and types of bonds in the market. To familiarize yourself with bond related key terms, refer to our comprehensive FAQs section.
Bond investors include government entities, pension funds, mutual funds, public & private corporates, banks and individual investors. This pie is now undergoing a structural shift where individual investors are rapidly growing as a large segment as they move away from the traditional choices of Fixed Deposits. Read: Here’s why your parents chose FDs and why you might not want to. IndiaBonds enables you to explore different types of bond options that you can buy online. Browse through our Bond Directory, get access to 25,000+ bonds, and invest in bonds online with ease!
Bond Type by Issuer
Bonds are issued by various entities and they are usually referred to by the type of their issuing entity:
Government Securities (G-Sec): Bonds issued by the Government of India to finance national developmental activities and form the largest segment of outstanding bonds in India. They are deemed to be the safest and referred to as “risk-free”.
State Development Loans (SDLs): Bonds issued by the State Government are called SDLs and are issued by different states in India for their developmental needs. These state government bonds have an implied guarantee from the central government but pay higher interest than G-Secs. Different SDLs have different ratings for each state given their respective credit strength.
State Guaranteed Bonds: These are government bonds guaranteed by a state for a particular developmental activity such as establishing infrastructure for electricity, roads, highways, towns, agriculture, etc. These are individually credit rated based on the financial strength of the state as well as that of the standalone state operating company.
Public Sector Bonds (PSUs): PSU bonds are issued by national companies where majority equity ownership is held by the Government of India. These companies are involved in growth activities in the sector of power, agriculture, housing, infrastructure, education etc. Each PSU has a separate credit rating based on its financial strength. However, it’s important to note that PSU bonds do not have any explicit guarantee from the government.
Corporate Bonds: These bonds are issued by private companies and are also referred to as Non-Cumulative Debentures or NCDs. People sometimes mix up meaning of bonds and debentures, but fundamentally they are the same thing! In India, bonds issued by private companies have been called NCDs implying they are not equity or have ability to ‘cumulate’ interest coupons that may be missed.
Bank Bonds: These bonds are issued by banks in India whether private or owned by the Government of India. Banks issue bonds to raise capital for lending and are the most regulated issuers. Depending on their balance sheet their bonds can be senior or subordinated with the latter having sub-categories such as Tier 3, Tier 2 or Tier 1 (which are perpetual).
NBFC Bonds: In most countries globally, the largest bond issuance sector (after government) are the financial institutions. Non-Banking Financial Companies’ (NBFCs) bonds are the same as corporate bonds but are just named independently given the total large issuance by this particular sector.
Bond Type by Structure
Investors have a wide variety of bonds in India to choose from based on their structure. Some broad categories are:
Fixed Coupon Rate Bonds (Plain Vanilla): These bonds are the most basic category having a fixed coupon payment at predetermined fixed intervals for instance quarterly, monthly, half-yearly, etc. with a defined maturity date.
Floating Coupon Rate Bonds: This coupon rate is linked to a benchmark rate (like interbank or SBI lending rate) and varies with the changes in benchmark rate at the time of coupon payment. These are a good investment in a rising interest rate economy as the investor is hedged versus higher future interest rates.
Zero-Coupon Bonds (ZCBs): These bonds are issued at a price much lower than the face value. They do not pay any interest coupon at all (hence the name ZCBs) and are redeemed at face value straight at maturity date. The difference between the discounted issue price and the redemption amount represents the return to the investor.
Callable and Puttable Bonds: Such bonds give the option to either the issuer (callable) or the investor (puttable), to redeem or get back investment before the maturity date. These dates are referred to as Call Date and Put Date respectively.
Subordinated Bonds: These bonds are usually issued by banks and NBFCs and rank junior to their regular “senior” bonds. Essentially in bankruptcy, their recovery claim is lower, and given this risk, coupon/yield on these are higher than senior bonds by the same issuer.
Perpetual Bonds: These instruments pay fixed coupon rates to investors but do not have a maturity date. Instead, they have predetermined Call Dates on which the issuer can decide to redeem the bonds. They are usually subordinated.
Tax-Free Bonds: PSU companies such as IRFC, NHAI, REC, HUDCO, NABARD, etc. issue tax-free bonds. The interest earned on these bonds are tax-free in the hands of the investor. These were introduced by the government to attract investors and raise vast amounts of capital for developmental needs.
Covered Bonds: These are structured debt instruments. A pool of assets is set aside to back the bond and, in addition, specific collateral is assigned to the bond. This gives dual recourse to the investors as the credit risk lies on quality of the pool as well as the financial strength of the issuer.
Principal Protected Market Linked Debentures: Certain floating rate debentures carry coupons linked to a benchmark like Sensex, price of Gold etc. A market-linked debenture does not pay any coupon before maturity.
Capital Gain Bonds: Capital Gain bonds or 54EC Bonds are bonds referred to under sec 54EC of the Income Tax Act, and are issued by NHAI, REC and PFC. 54EC Bonds are a good choice for investors who would incur long-term capital gains from the sale of a property. These bonds can help you avail tax exemptions up to Rs. 50 lakhs per year.
To conclude, the biggest advantage of investing in bonds in India is that they provide predictable income streams with less volatility. In the past few years, the domestic bond market has not only increased in size but also in traded volume. Individual investors are a large chunk of this growth, and the mission of IndiaBonds is to provide easy online access – both in terms of a platform for investment and a repository of bond knowledge! Time to EXPLORE bond investment online now!
Disclaimer: Investments in debt securities are subject to risks. Read all the offer related documents carefully.
