Over the past two years, India’s investment market has seen a sharp rise in the number of retail investors beginning to populate their portfolios. There has been an influx of liquidity into India’s financial markets, including equities, derivatives and commodities. However, not all financial instruments are made the same.
Equities with higher returns are often associated with higher risks, and risk appetites vary from individual to individual. A financial instrument that works for your neighbor may be a bit too risky for you. This is where bonds come in. Traditionally, investing in bonds has been considered low-risk for long-term bets. You can think of bonds as debt security where you and other investors lend money to the issuing institution for a certain amount of time.
In India, bonds are issued by the Reserve Bank, central & state governments, PSUs, and corporations. Various economists have noted that a well-developed bond market supports economic development as it provides organizations with an alternative means to finance their undertakings, reducing the pressure on the banking system, especially in times of volatility. Historically, investor interest in bonds rises when there is economic uncertainty that makes equities and other instruments liable to higher-than-average market risk. As the awareness levels of Bonds as an investment instrument are now steadily picking up, bonds are gradually becoming a go to investment option for investors who are looking at earning higher returns as well as capital security. In this blog we will briefly cover how to invest in bonds as well as why invest in bonds in India.
Before diving into the depth of how to invest in bonds, let us explore the terms associated with the debt market:
Also known as ‘Par Value’, this represents the fundamental value of the bond. In India, the most frequent face value is ₹1,000.
The rate of interest paid by the bond issuer to investors. A bond with a coupon rate of 10% means that the bond will pay interest @10% per annum on the face value of the bond.
The predetermined date at which the issuer repays the principal amount. For instance, if the maturity period is 5 years, then the bond issuer will repay the principal after 5 years.
Bonds are frequently traded on the open market, where the current price refers to the quoted price. If the bond is trading at Rs. 4000 in the exchange, then Rs. 4000 will be the current price.
The return you, as an investor, receive for holding the bond. For example, suppose you earn an interest of Rs. 200, and the bond is priced at Rs. 1500. In that case, the yield of this bond will be 13.33% (i.e., Rs. 200/1500 * 100).
Here are some of the prominent reasons why you should be investing in bonds:
Bonds provide returns in the form of interest payouts. This ensures regular returns to the investors. Bonds carry a fixed coupon rate; thus, the returns are fixed and regular.
Bonds are a great option to diversify your portfolio. If you have a high-risk portfolio, you can invest in bonds to diversify your portfolio and reduce your overall risk.
Bonds are a more secure investment option than equity and other riskier avenues. The primary reason behind the same is that bond interest rates are fixed. While there might be changes in the bond value, the overall returns are stable and secure compared to the equity.
Listed bonds are regulated by the Security and Exchange Board of India (SEBI). SEBI acts as a watchdog for listed securities to prevent any irregularity and protect the investors’ interests.
Most of the bonds are highly liquid. You can purchase and sell the bonds anytime in the secondary markets.
Bonds provide authority to investors to decide the frequency of interest payouts. Interest can be paid either monthly, quarterly, semi-annually or yearly, depending upon the frequency decided.
The bond does not require a huge amount of investment. The minimum amount to invest depends upon the type of bond. Bond investment can start at as low as Rs. 10,000 if investing through primary markets.
Bonds frequently return higher interest than FDs and savings accounts. They are tradable on secondary markets, unlike FDs, allowing you to access liquidity at any time.
Corporations or governments issue bonds to raise debt from investors. Being debt instruments, it gives priority to bond holders over equity holders during dissolution or bankruptcy. Thus, bondholders will get priority in payment compared to equity investors at the time of liquidation. This further reduces the risk to bond investors.
In India, you can start investing in bonds through the following:
To summarise, investing in bonds is an easy way to diversify your portfolio and manage your risk exposure effectively. Most investors invest in bonds to diversify their portfolio and earn a regular passive income. They are one of the most popular investment avenues for risk-averse investors.
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Bonds can be judged by the investor in terms of yield, maturity, payment frequency, investment goal and risk appetite. SGB is a popular option amongst investors as it provides the benefits of gold and debt instruments while avoiding the risks of both.
There are various ways of purchasing bonds in India through the primary and secondary markets. These include your broker, stock exchanges, the issuing company, and numerous online platforms.
Usually considered low-risk financial instruments, bonds are a way for investors to diversify their portfolios while earning a steady flow of interest payments.
In most cases, yes, bonds can provide a higher return on your capital than a fixed deposit or a savings account. They are also more liquid. However, you should proceed with caution and ensure your investment decisions are in line with your financial goals.
There are some bonds issued by the Government of India where interest payments qualify for tax breaks. Please note that earnings made through trading tax-free bonds on secondary markets will count towards your taxable income.
Disclaimer: Investments in debt securities are subject to risks. Read all the offer related documents carefully.
