What are the Types of Bonds One Can Invest In?

Bonds – A Safe Investment Instrument

Investing should be made taking into consideration several factors. You can seek advice of experts if you are unable to take the decision. The experts will analyze the available options for investment and help you take right investment decision. You can choose to go for investing in equities or fixed income securities based on your various financial needs.

The growing inflation rate have become a big concern for all including retail investors in the country. The low return in fixed deposits have forced investors look for alternative options. Bonds today have become one of the most popular sources for fixed income. It is the investment option that provides the essential things you expect in a financial instrument. Bonds have proved relatively better than fixed deposits and so have witnessed increased demand in the market.

Bond at a glance

Let us know what are bonds? and why choose it for investments. A bond is a type of security issued to an investor who buys bonds. It is issued against the loan raised from the investors. The bondholder here gets a periodic income in the form of fixed interest at the agreed interval until maturity. Bonds are chosen for many good reasons. It has some features that make it an irresistible instrument. If you are planning to park your surplus in a dependable option, bonds can be a good choice for you. It can fulfill your need for periodic income, better returns, capital protection, liquidity, and minimal risk. So, what are you waiting for. Expand your knowledge about it and take wise investment decision today.

Know what is the meaning of bond?

Bonds in India is not as popular as fixed deposits. Why not understand the meaning of bond in brief.

What is the meaning of bond?

The issuer issue bond with the aim of raising money to support expenses for business operations, expansion, project management, to buy a new property for a business and for many other purposes. People in the middle segment prefer to park their surplus funds in a bank or with a NBFC promising a fixed rate of interest payable with the principal at the end date of maturity. FDs although do not pay a good return it is the preferred option for safe investment. Bond has emerged as one of the dependable instruments known to offer returns which is higher than FDs. The above is the answer to your question what is the meaning of bond?

Why do organizations prefer issuing type of bonds against raising bank loans?

Organizations at many times need capital to fund the different projects. Companies in need of capital gets loan from banks but on a higher rate of interest. But when the same fund is raised from the investors, the liability to pay interest decreases up to 5 percent and the cost of raising fund is also comparatively low. Hence, issuing bond is preferred in comparison to raising loans from different lending institutions.

Types of Bonds

Bonds unlike other useful investment option for fixed income is popular for its floating and fixed rate of interest. People can choose to invest in distinct types of bond and in a bond yielding floating or fixed interest rate based in personal finance interest.

The Types of Bonds at a Glance

1. Government Bonds

Buying government bonds can help you overcome the risk of default as it is a safe option. Since it is issued by state or central government, it is considered safer. The key advantage of govt. bond investment is that one does not need to analyze credit rating as govt. bonds are completely safe. There is no default risk by the Indian government.

2. PSU Bonds

Public Sector Undertaking Bonds (PSU) bonds here refer to Bonds that generally have over 51% government shareholding and it is issued by public sector companies in India. It is a medium and long-term debt instruments. It is a preferred option for buyers interested in buying bonds. Example, Indian Oil Corporation Limited. 

3. Corporate Bonds

Public corporations and private companies in the market issue corporate bond known to provide better rate of interest. It is a debt security that guarantees fixed interest and return of face value at the agreed maturity. Higher the interest more can be our income but make sure you invest wisely and do not choose a company with low credit rating.

4. Tax-Free Bonds

It is a bond preferred for its tax-free feature. People looking to save tax choose to make investment in tax free bonds. The government raises funds through the medium of Tax-free bonds to fund one or more projects.

5. Zero-Coupon Bonds

It is known to trade at a deep discount and do not pay periodic interest. It has its own importance, and a fixed interest is guaranteed.

6. Green Bonds

Green bonds are a debt security and a fixed income instrument that is aimed at raising funds for a specific project that include climate-related or environmental projects. Reserve Bank of India (RBI) has published a study which states that the cost of issuing ‘Green Bonds’ remained on a higher side as compared to the rest of the bonds in India due to the asymmetric information.

• The study states that the Green Bonds comprises only 0.7% of all the bonds issued in India since 2018.
• As of March 2020, bank lending to renewable energy comprised 7.9% of the balance band credit to the power sector.
• In India, the public sector units, or corporates issue most of these bonds which indicate better financial health.
• Asymmetric information or information failure along with a high coupon rate are the major governing factors behind high borrowing costs.
• A sound information dissemination system needs these times as it could help in minimizing the maturity mismatches, borrowing costs and as a result may cause efficient resource allocation.

Bond Market

Know about bond market in brief

Bond market has a significant importance in fixed income securities. The market is classified into two – primary market and secondary market. You can make use of the one you feel is more beneficial for you. Risks and rewards go hand in hand. Choosing government securities and issuers with good ratings help you to overcome or minimize risks.

What is bond yield?

Let us understand what is bond yield? for an informed decision. Bonds are giving more returns than other available alternate investment products. Bonds can help you yield return up to 13% subject to certain conditions. Your decision to make investment in the recommended top-rated bonds can help you earn higher yield. You can have a look at the top performing bonds before your decision to buy it.

Bond interest rate

Returns in investment is of very much importance and so it should be your priority. Know about bond interest rate as it can help you plan your financial goals. The interest rate in bonds vary based on the bond type. Hence, gather the relevant information before initiating your payment transaction.

About Credit Rating

Credit rating in finance keeps an immense importance. It can help you take better investment decision. It helps you choose a dependable and the right issuer of bonds. The credit rating is given to the companies and other entities based on their credit worthiness and reputation in the market. There are many other factors consider while allowing ratings to the entities in the market.

Since there are many rating agencies, there are chances that rating may vary. You are advised to consider rating of more than one rating agency prior to making transaction for the investment. The rating allowed to bond issuers include

AAA-rated bonds are considered safe and there are a minimal chance of company declaring default. Hence, investing in companies having AAA rating is like investing in a risk-free instrument.

Rating scale for Fixed Deposits by CRISI

Below is the fixed deposit rating scale allocated by CRISIL (Credit Rating Information Services of India Limited):

 

What is bond duration?

Duration in every investment avenue has a profound impact. It can affect the rate of returns and maturity amount. Therefore, learning what is bond duration is in your interest. Bond duration is the maturity when an investor receives his face value of principal back.

Conclusion

There is a diverse category of bonds one can choose to invest in considering bond duration. Corporate bond and government bonds are the popular bond type people prefer for the safe investment in India. Expand your knowledge and make smart investment decisions for a better deal.