Types Of Bonds
Most investors wish to invest in such a way that guarantees high returns and low risks. While the risks associated with the investment are subject to changes in the market, returns are determined by the type of investment, namely, fixed return and variable return.
Bonds are one such fixed return investment instrument. These are high-security debt instruments and act as loans offered by investors to a borrower. Bonds are issued by entities – government, companies, and municipalities, which enable them to raise funds and fulfil capital requirements.
The issuer pays interest at fixed intervals and repays the principal at the end of the maturity/locking period. To be precise, when an investor purchases any bond, they lend money to the issuer against which the issuer promises to pay interest (known as a coupon) for a prespecified period. The authorised issuer repays the face value (nominal value of the security as stated by the issuer) of the bond upon maturity.
Investors willing to ensure a fixed income and higher yield can consider investing in bonds through KredX for a seamless digital investing experience. Before that, investors must know about the different types of bonds to make an informed investment decision.
Types of bonds in India:
Some of the popular bonds available in India are discussed below:
Bonds by issuers
- Central Government Bonds: RBI issues these on behalf of the Central Government. These bonds fall under a wide range of government securities (G-Sec) and are issued to finance the fiscal deficit and fulfil the gap in government revenue. These bonds are one of the safest investment instruments as they are government-backed with a negligible risk of non-repayment. The current yield for ten year-government bonds is 6.12% p.a. However, this yield fluctuates depending on the RBI monetary policy and the government’s borrowing programme.
- State Government Bonds: Also known as State Development Loans, these are issued to finance fiscal deficit and are a low-risk investment. These types of bonds are tradable and enlisted on the stock exchange.
- Municipal And Local Authority Bonds: Municipal corporations and local authorities issue such bonds to finance infrastructure development, construction of public water houses, bridges, schools, etc. These authorities pay investors interest through the profits/returns generated from these initiatives.
- Corporate Bonds: As the name suggests, these are issued by corporates or companies to meet financial requirements banks and other financial institutions cannot match. With corporate bonds, investors earn fixed income at regular intervals, which is higher than their government counterparts. These types of bonds can be secured or unsecured. Secured variants offer increased security and lower returns and vice versa. Corporate bonds can be further classified into two types:
- Convertible: Can be converted into equity shares as per stipulations. These allow investors to become part owners of the company and enjoy a stake in its future profits.
- Non-convertible: Cannot be converted into equity shares.
- Banks And Other Financial Infrastructure Bonds: Banks and financial institutions like NABARD, SIDBI also issue bonds.
Bonds By Interests Rates:
- Fixed-rate Bonds: This debt instrument features fixed coupon rates throughout the tenure and assures investors of consistent earnings irrespective of market fluctuations.
- Floating-rate Bonds: They come with inconsistent coupon rates, which are determined by various market factors. Hence, these bond types don’t guarantee fixed returns.
Other types of bonds include:
- Sovereign Gold Bonds (SGBs): Offered by the Government of India, SGBs are highly secured loans that enable investors to invest in gold without the obligation to keep the physical gold with them. These bonds come with a maturity of 8 years with a 2.5% interest rate, and investors can redeem their investment after the first five years.
- Inflation-indexed Bonds: One can invest in inflation-linked bonds to hedge against the impacts of inflation. Its key feature is the principal amount and interest are regularly indexed per the inflation or deflation rates. In such bonds, the coupon rates are usually lower than fixed-interest bonds.
- Tax Savings Bonds: It is one of the most popular types of bonds in India. Under section 80 C of the IT Act, investments in such bonds enjoy tax exemptions and are issued in the market during the NOV-March session of tax planning.
- Zero-coupon Bonds: Zero-coupon bonds are issued at a discount and redeemed at face value. Hence, the profit earned from these bonds is equivalent to the difference between the discounted face value and redeemed face value. Hence, these types of bonds do not offer any interest during the maturity period.
- Bonds With A Call Or Put Option: These types of bonds enable participating entities (issuers and investors) to utilise their rights of buyback or redeem bonds at face value after five years from the issuance date.
- RBI Bonds/Floating Rate Savings bonds: One can invest in these with a minimum of Rs. 1000 with no upper limit and feature a tenure of 7 years. The interest rate is reset every 6 months, and the interests are taxed as per the investor’s income slab.
With so many bonds available in the Indian market, investors, especially a debutant, might be baffled at the outset. However, equipped with the knowledge of different types of bonds, their associated return rates/profitability, tenure, call risk, etc., they can lock in on the instrument most suitable for them. Benefits can touch a higher note if one chooses KredX, where one can invest in PMS, digital gold, and bonds from various issuers.