Over the last few years, Indian investors have started exploring alternatives to traditional investment options like fixed deposits and stocks. More and more investors now include bonds to earn returns and diversify their portfolios. As people recognise the benefits of bonds investment, one must explore the bond market and know how to invest in them confidently.

What are Bonds?

Bonds are agreements between investors and borrowers in which the issuing entity borrows money from the investors for a pre-determined period and pays interest in return. Bonds are just like Fixed Deposits where investors get regular income through fixed interest and principal on their investment. Moreover, unlike FDs, the invested money is not locked-in since bonds can be easily sold on exchanges such as NSE and BSE. Bonds investment carries a lower risk than stocks, so they have become a significant part of almost every investor’s portfolio. Apart from receiving a stable income stream after retirement, bonds are also good alternatives to present income sources.

When they buy a bond, investors lend money to the issuing company. They receive regular interest at pre-determined rates and the principal amount at maturity. Government bodies, corporations, and PSUs usually issue bonds to raise capital for business expansion, short-term expenses, or infrastructure development. Investors help them achieve their goals and earn good returns.

Explore the Different Bond Types Available in India

Since there are different types of bonds available in India, one must understand them before investing:

• Government Bonds: Central government issues these debt securities, also known as Government Securities or G-Secs, to finance public expenditures. Since they have the government's backing, they are considered low-risk bonds with short—or long-term maturity periods. State Governments also issue such bonds and are known as State Development Loans or SDLs. Since Government bonds provide fixed interest payments and are practically risk-free, they are the best investment instruments for conservative investors seeking long-term, stable returns with high safety.
• Treasury Bills: Treasury Bills or T-bills are short-term government securities maturing in less than a year. They do not pay interest, and the investor’s return is the difference between their purchase price and the value at maturity. These low-risk bonds are suitable for short-term investors who need a safe place to park their funds temporarily.
• Municipal Bonds: Local bodies issue these bonds to finance public projects like community services and infrastructure development. The interest earned is tax-exempt in certain cases, making them appealing to high-income investors.
• Corporate Bonds: Private companies issue these bonds to raise capital for operational expenses or expansion goals. Due to the relatively higher risk involved, the interest rates are higher than those of government bonds. They are ideal for investors with a moderate risk appetite.
• High-Yield Bonds: Companies with low credit ratings (BB or lower) issue high-yield bonds, also known as junk bonds. Since they have a higher default risk, they offer greater interest rates to investors. They are suitable for investors who can risk more in exchange for bigger yields.
• Investment-Grade Bonds: Governments or companies with strong credit ratings (BBB- or higher) issue these bonds. They are less risky for investors and provide the perfect balance of safety and returns to investors looking for a stable income stream.
• Zero-Coupon Bonds: These bonds are available at a discount to their face value. They do not provide interest payments, but the full face value of the bond at maturity. Long-term investors seeking lump sum payouts at maturity prefer these bonds for goals like retirement and education.
• Inflation-Linked Bonds: These adjust the principal and interest payments according to the inflation rate, protecting investors from inflation. They are the best instruments for investors looking for a hedge against inflation.
• Sovereign Gold Bonds: These are government securities denominated in grams of gold, meant to serve as substitutes for holding physical gold. While the interest rate on these bonds is fixed, their redemption value is determined by the prevailing price of gold in the market.

Step-by-Step Guide for Bonds Investment in India

After understanding bonds' meaning and types, here is a step-by-step guide to learn how to invest in them:

• Open a Demat Account: A demat account is mandatory for bond investments in India. An individual can easily create one without any account opening or maintenance charges. Any person above 18 years of age can open a demat account on the platform.
• Provide the Necessary Documents: To complete the KYC process, one must provide documents like an Aadhaar Card, PAN Card, bank details, and a signature on a blank paper.
• Explore the Bond Options: After creating an account and logging in, an aspiring investor can view the bonds available for trading. They can choose from over 10,000 bonds available for investment. The investor must select a suitable bond according to their financial goals and risk appetite and start investing.

Things to Check Before Investing

First-time bond investors must check the following things to succeed with bonds investment:

• Credit Rating: Before investing, it is important to check the issuing entity’s credit rating. A high credit rating represents a minimal risk of loss and the issuer’s strong capacity to meet obligations.
• Maturity: Bonds can have short-term or long-term maturity dates. While short-term bonds provide security, long-term bonds offer higher returns with higher interest rates.
• Yield to Maturity (YTM) / Fixed Returns: It measures a bond’s total annualized return incorporating both the interest and principal payments. This valuable metric helps compare different bonds and evaluate their potential returns. Calculate bond interest online to evaluate the returns. Usually, bonds offering high interest rates carry more risk. So, one must decide according to one's investment goals and risk appetite.
• Interest Payment Frequency: Some bonds pay interest monthly, while others pay quarterly, semi-annually, annually or cumulatively at the time of maturity.
• Tax Implications: Some bonds offer tax benefits to reduce the investor’s tax liabilities. However, such bonds may provide lower returns. One must check the bond’s tax implications before investing.

With technological advancements and the emergence of online platforms, bond investment has become much easier, more convenient, and more user-friendly than ever. Platforms like Bondbazaar provide an effective interface for exploring the available options and starting to invest in bonds. After browsing more than 10,000 bond options on the platform, you can decide to balance your portfolio and enhance security.

Read More News :

Understanding Gold Prices and Their Impact on Gold Loans

Investment of $24-bn Potential in India in global green drive