A Beginner's Guide to Invest in Bonds

Feb-11-2022Blog by – Mr. Ashish AjmeraRead Time: 2 Min.Word Count: 543
182A Beginner's Guide to Invest in Bonds

Bonds are one of several investment options to invest in a company in India. However, the bond market is different from equity trading which involves stocks and shares. An individual becomes a shareholder after buying equity but a bond investor becomes a creditor to the issuer.

Let’s understand the bond market in detail.

What are Bonds?

Bonds are debt instruments with fixed income. An investor lends money to the individual, government, or corporate for a fixed period. The interest rate is either fixed or variable. The interest is known as a coupon. The owners of bonds are called the creditors or debt holders for the issuers.

Advantages of Bonds

Many investors prefer bonds for the following reasons:

  • Bonds are more secure as compared to the equity or currency market in India. Bond investors know the amount of interest and payback they will get at maturity. 

  • If there is an event such as liquidation or insolvency, bond investors have the first claim on the company’s assets. 

  • Bonds are also a good way to diversify your portfolio, especially if you are looking to balance volatile investments. 

  • The investors get the full principal amount on maturity. Hence, it also brings the benefit of capital preservation.

Disadvantages of Bonds

The only drawback with bonds is that they usually offer low returns. But, the kind of safety they offer in terms of secured investment offsets the low returns.

Types of Bonds

Here is the primary classification of bonds:

  • Corporate Bonds: These bonds are issued by private companies.

  • Government Bonds: These bonds are issued by the Government of India.

  • Bank and Financial Institution Bonds: These bonds are issued by banks and financial institutions.

  • Inflation-Linked Bonds: The principal amount and interest of these bonds are indexed to inflation. 

  • Tax-Free Bonds: These bonds offer tax-free interest returns.

  • Perpetual Bonds: These bonds have no maturity date and investors get interested till the existence of the bonds.

  • RBI Bonds: These bonds are issued by RBI on behalf of the government of India. The investors can purchase RBI bonds through SBI as well as nationalized banks and private banks authorized by the government. 

  • Sovereign Gold Bonds: These bonds are again issued by the government of India, denominated in grams of gold. They serve as substitutes for physical gold.

  • Convertible Bonds: These bonds can be converted into equity on predetermined terms.

How to Invest in Bonds?

Investors can invest in bonds by opening a Demat account and then applying online. You can subscribe to the public issue of large companies in the primary market. If you are looking for investment through the secondary market, then you can trade on exchanges. You can even invest through a stockbroker. However, do make sure that the stockbroker is trustworthy and has the necessary expertise in handling your bond investments. 

Bonds make a good choice for investors who are looking for a well-diversified portfolio and want the safety of their investment. However, you should study the profile and terms and conditions of the bond issuer so that you know potential risks. It is advisable to invest in bonds through a registered broker or a financial services platform when you are a beginner. This will help you to acquire a good understanding of the bond market.

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