Invest In Bonds
Which Offers Fixed Return

What are Bonds and Debentures?

Bonds and debentures are debt investment instruments with a Fixed Rate of Return and Fixed Maturity Period. While Bonds are securities that are mostly issued by the government, debentures are always issued by corporations.

Bonds and Debentures are issued by these entities to raise money from investors as loans used to fulfill business objectives like entering new markets, starting a new project, or scaling existing businesses. For every bond/debenture issue, fixed interest payments (Coupons) are made regularly on pre-specified dates. The principal loan amount(face value per unit of Bond/ Debenture) is paid back on the pre-specified maturity date.

What are Features of Bonds?

Bond funds provide a safer and steady source of income at regular intervals and have the following features:

Face Value: It is the value of the bond when it is first issued by the company. However, after the bond starts to trade in the secondary market, the face value changes to trade either at a discount or premium from the actual face value.

Coupon Rate: It is the actual rate of interest attached to the bonds and determines how much interest the issuer will provide to the holders of the bonds regularly. For example, if a 10-year bond with a face value of Rs 10,000 has a coupon rate of 5%, it will provide Rs 500 as interest payments.

Credit Quality: Every bond comes with a credit rating provided by various credit rating agencies. The rating is based on the financial condition of the issuer and whether it has enough money to fulfil the payment promises. The higher the credit rating, the safer the bond investment

How does Bond work?

Although governments and private organisations can raise funds through disinvestment or public issues such as IPOs, the issues can not provide a steady stream of capital. Hence, government and private organisations issue bonds to ensure they raise adequate capital.

Bonds work similar to other debt instruments and come with the obligation on the issuer’s part to provide regular interest payments to the holder and the repayment of principal at the time of maturity. After completing the bond investment, the issuer pays interest to the holders of the bonds based on the coupon specified at the time of the bond issuance.

Once they are issued and start trading in the bond market, investors can either hold them until maturity to realise all possible interest payments or can sell them to other investors to make profits based on the difference between the prevailing bond price and the face value. However, if the bonds are sold to a new buyer, the issuer is liable to pay interest to the new buyer at the time interest is due.

How to Invest in Bonds?

You can invest bonds in India through the following options:

Through a Broker: You can invest in bond funds from an online stockbroker by opening a Demat and a trading account.

Through ETFs: You can invest in bond ETFs that are listed on various stock exchanges and invest the money across various types of bonds such as corporate, government etc.

What Factors should you Consider before Investing in Bonds?

Bonds, like every market-linked instrument, also carry a level of risk. However, you can further mitigate the risk level attached to bonds investments by considering the following factors before investing in bonds in India:

Prospectus: Before you invest in a specific bond, it is critical to read and analyse the prospectus in detail. Every issuer is mandated to file a prospectus that includes everything you need to know, such as face value, tenure, coupon rate etc. You should read the prospectus to ensure the investment is ideal.

Credit Rating: Before investing, make sure that the credit rating is equal to or above AA to ensure the negligible risk of default. Consider the financials of the company to ensure its cash flow is positive.

Price Risk: Price risk is the sensitivity of the bond price to changes in the interest rates in the market. Analyse the price risk associated with the bond to understand how much the bond price can fluctuate if the interest rates change in the future.

Stockbroker: Stockbroker plays an important role in easing the bonds investments and provides a link between the investor and the bonds market. As you will be opening a Demat and trading account with the stockbroker to invest in bonds, choosing an ideal stockbroker is important.

Types: There are numerous types of bonds, such as government bonds, corporate bonds, zero-coupon bonds, floating-rate bonds, convertible bonds etc. The bonds you choose should complement your financial goals and should be at par with your risk profile. You can consult an investment advisor to choose the ideal bond type before investing.