Veteran investors do not need any convincing as far as investing in bonds is concerned. However, those new to the world of investing, including Gen Z, must know the various types of bonds to invest in India to diversify their investment.
Know more about Bonds
Before you dive deep into bond investment in India, it is essential first to understand more about bonds.
A bond is defined as a simple contractual agreement between the lender of the funds and the borrower. It is equivalent to a loan or debt to a corporate entity or government that is the bond issuer. In return, an investor receives a promise to receive the funds invested along with guaranteed interest, which can be fixed or variable on maturity, as mentioned in the bond.
Bond investment in India offers investors the opportunity to get a return in the form of periodical payments along with interest at the time of maturity. Investing in bonds has a few advantages too. Check our blog, 5 Advantages of Investing in Bonds You Must Know
Now that you know a little bit more about the bonds, let us understand the types and how they work better.
Bonds Investors Can Invest in India
There are several categories of bond listing on the BSE and NSE. However, the bond market in India comprises 8 types of bond to invest that are open to investors for a subscription.
1. Government Securities Bond:
The government securities bond or the G-Secs are debt instruments issued by India’s state or central government. The state government can also issue bonds known as State Development Loans. Generally, these bonds are long-term, spanning 5 to 40 years.
The G-Secs are an ideal investment instrument for those looking to invest small amounts with a low-risk quotient. Most importantly, investors can earn interest. The interest can be fixed or floating and disbursed on a semi-annual or annual basis on these types of bonds. That said, most government bond are issued at a fixed interest rate.
2. Corporate Bond:
Companies can also issue bonds. They are called corporate bond that helps companies raise capital by enabling fixed bond interest rates throughout the bond tenure. At the end of the term, the investor receives the face value and interest.
It is like taking a bank loan but from private investors who believe in the company’s future growth. Companies can issue Bonds for many reasons. It can include the expansion of the business or financing a new project.
Such a bond investment comes with low risk and is ideal for anyone looking to earn a fixed interest rate for a predefined investment tenure.
3. Convertible Bond:
Those looking for a bond with equity and debt features can opt for convertible bonds. The investors can convert the bond into a predetermined number of stocks. Doing so changes the bondholders into shareholders of the company.
They get all the usual benefits that an ordinary company shareholder receives. The advantage -investors benefit from both equity and debt markets by choosing to invest in convertible bonds.
4. Zero-Coupon Bond:
As the name suggests, zero-coupon bond do not offer investors any interest. Because these are pure discount bonds, the issuer does not provide a regular interest rate until such time that the bond matures.
Hence, the yearly return on zero coupon bonds includes the principal face value. The interest quotient may or may not be applicable when the bond reaches maturity.
5. Inflation-Linked Bond:
If you are looking for a bond that is inflation averse, then one of the best investment ideas is to bet on inflation-linked bonds. It is because the central and state governments generally issue such bonds.
The objective of an inflation-linked bond is to minimize the impact of inflation on coupon payments and face value. Therefore, the principal investment amount is adjusted based on the inflation rate. The interest rate payments are made considering the adjusted principal in this instance.
6. RBI Bond:
The Reserve Bank of India launched the Floating Rate Savings Bond 2020 (FRSB), also known as the RBI Taxable Bond. These bond come with an investment tenure of 7 years, with the interest rate floating during the entire term.
The central aspect of the RBI bond that investors must note is that it is reset every six months. It means that the investors receive the interest paid out on a half-yearly basis instead of maturity.
Most importantly, the interest payouts may increase if the floating rate also goes up when the economy is performing well.
7. Sovereign Gold Bond:
The central government issues a sovereign gold bond that is perfect for those investors who wish to invest in gold but do not own them in their physical form. It is a highly secure government bond that is exempted from taxation. The minimum tenure of such a bond is 8 years. However, the holding period is 5 years, after which the investors can redeem their investments via the secondary market.
Takeaways
As far as money-making ideas are concerned, Gen-Z investors should balance their portfolios with a healthy mix of low-risk bond. It is also a suitable investment option for anyone without experience or expertise in investing in the stock market.
Read more: How Long-term investing helps create life-changing wealth – TOI