Bonds are one of the many investment options in India in which investors can invest their hard-earned money.
A bond is a debt instrument where the issuer company borrows funds from the bondholder and, in return, the issuer company is obliged to pay interest that is known as the coupon.
The bondholder enters into a formal contract with the issuer who decides to repay borrowed money with interest at specific periods like on a semi-annual, annual or monthly basis.
The difference between bonds and stocks is that stockholders have an equity stake in the company, whereas the bondholder has a creditor stake in the company.
In India, the Government as well as the business owners issue these for raising funds to finance its long-term investments or their current expenditures needs.
These are considered to be a safe instrument as there is low risk involved in it as compared to other investment options available in India.
In this blog we will discuss 7 types of bonds that investors can invest in India:
1. Government Securities Bonds:
The Government securities bond is a debt instrument that is issued by the central or the state Government of India.
In India, Government bonds fall under the category of Government securities (G-Sec) that mainly offer long term investment between 5 to 40 years.
Bonds that are issued by the state government are also known as State Development Loans.
The Government of India has made these government securities so that the small investors can invest in small amounts for earning interest with lower risks.
Interest can be fixed or floating that is disbursed on a semi-annual basis on these types of bonds. However, most of the government bonds are issued at a fixed interest.
2. Corporate Bonds:
Corporate bonds are issued by the companies to borrow money from investors for a fixed period and give them a specific interest rate throughout the tenure.
Companies usually issue bonds to investors for expanding their business for future growth through raising new capital or for starting a new project.
For the above purposes, the company asks investors to invest their money in exchange for a specific rate of return for a tenure instead of taking a loan from the banks.
After the tenure ends, investors receive the face value along with the interest rate.
This type of bond is preferred by those investors who want to earn a fixed interest rate for the tenure of their investment.
3. Convertible Bonds:
These offers both the features of debt and equity but not at the same time.
This can be converted into a predetermined number of stocks and the bondholders can become shareholders of the company and get all the benefits that are offered to shareholders.
Investors can take the benefit of both debt and equity instruments after investing in convertible bonds.
As the name suggests, Zero-Coupon Bonds do not give any interest.
This bond is also referred to as the pure discount bond in which the money invested does not offer a regular interest rate until the bond gets mature.
The annual returns on the principal amount include the face value, and this amount is paid to the investor when the bond matures.
This type of bond protects against inflation and is made for cutting out the inflation risk of an investment that is mainly issued by the government.
In Inflation-linked bonds, the principal and interest rates rise and fall with the rate of inflation.
6. RBI Bonds:
The floating rate saving bonds 2020 (FRSB) which is issued by the RBI is also referred to as RBI Taxable bonds with a tenure of 7 years, and the interest rate keeps floating during the tenure.
The interest rate is reset every six months, the first being on January 1, 2021, this means that the interest rate is paid every six months rather than receiving it at maturity.
The floating interest rate can rise when the rates in the economy go up.
7. Sovereign Gold Bonds:
This type of bond is issued by the central government for those investors who want to invest in gold but do not want to keep gold in physical form with them.
The interest earned from this bond is exempted from tax. It is also considered a highly secured bond as it is offered by the government.
Investors who wish to redeem their investment can redeem it after the first five years, which will only affect the date of subsequent interest disbursal.
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Government Bonds are the most secure forms of investment in India which are attributed to its Sovereign guarantee. Risk-averse investors can invest in this type of securities. It is also a suitable long term investment option for those who do not have experience and knowledge of investing in stock market tools.
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