Thinking about preserving your capital & earning fixed returns? Corporate Bonds are a good option for people who want relatively less risk and regular income. Many Indian investors look at stocks first, but Bonds should not be ignored and should be a part of their portfolios. They offer balance and peace of mind for those who want to preserve their hard-earned money.
What Are Bonds?
A bond is a loan given to a company or a government for a pre-defined period & in exchange you get paid interest at regular intervals. When the period ends (maturity), you get your money (principal amount) back. This makes bonds a “fixed income” investment, as you know how much you’ll earn in advance.
Why Choose Bonds?
- Fixed Returns: Bonds are less volatile than equities & they offer fixed returns.
- Regular Income: You get paid interest – monthly, quarterly, semi-annually or annually.
- Lower Risk: High-rated corporate bonds are often less risky than other asset classes & government bonds (G-Sec) or State Guaranteed Bonds are often regarded as the safest investment instruments as they come with Sovereign Safety & guarantee of the state governments respectively.
- Portfolio Diversification: Bonds are an important part of your portfolio that offer fixed returns, regular income & a cushion against market volatility.
Types of Bonds in India
You will see different forms of bonds in India suitable for new and experienced investors.
Government Bonds (G-Sec)
Issued by Indian central or state governments & come with the highest safety i.e. Sovereign safety & are risk-free. Few examples are:
- Government Securities (G-Secs): Offered by central or state governments to fulfil debt obligations of the Govt. These carry practically no risk of default and therefore are called risk-free gilt-edged instruments.
- Treasury Bills: These are money market instruments issued by Government of India and are issued at three tenors – 91 days, 182 days and 364 days.
- Sovereign Gold Bonds: SGBs were linked to the gold commodity price & offered 2.5% annual interest.
Corporate Bonds
Companies issue corporate bonds to raise money & carry out operations and other activities essential for running a business. They typically pay slightly more interest than Government bonds but come with some degree of risks depending on their credit ratings.
Tax-Free Bonds
These are issued by government-backed entities. All the interest you earn is tax-free, which is great for higher income investors.
How to Start Investing in Bonds in India
Here is a clear, stepwise method to begin:
1. Set Your Goal: Are you saving for your child’s education, a new house, or just wanting income every month? Your goal helps you pick the right type of bond.
2. Open a Demat Account: You need this account for most bonds. With some OBPPs, you can use the same demat account that you have with your existing stockbroker. A demat account is mandatory as your bonds are essentially securities and will be credited to your demat account directly.
3. Understand Bond Details: Look at the bond’s credit rating, Yield to maturity, how long you need to wait before getting your principal back (maturity), and its coupon rate. Ratings range from AAA to BBB. It is generally advised for new investors and for investors who are risk averse, not to invest in BBB- rated bonds and below.
4. Where to buy Bonds?
- Online Bond Platform Providers (OBPPs): These are SEBI-regulated stockbrokers in the debt segment that provide an online platform for investors to buy and sell bonds. SEBI has eased investments into Bonds by bringing down the entry barrier to just ₹10,000. You can buy a Bond in a matter of minutes with OBPPs.
- Stockbrokers: Some stockbrokers also offer Bonds but investors need to be aware if they have a valid SEBI license of OBPP to operate in the Bonds segment.
- RBI Retail Direct: Buy government bonds straight from the Reserve Bank of India online.
5. Complete Your Investment: Pick your bond, decide how much to invest, pay using your linked account, and the securities are credited in your Demat account.
Some Tips for Beginners
- Start Small: Begin with smaller amounts to get used to bonds. You can start with as low as ₹10,000 in corporate bonds and government bonds.
- Diversify within Bonds: Mix and match and diversify your bond portfolio with multiple bonds based on your goals.
- Watch for Unexpected High Interest: If an interest rate seems too good to be true, check the credit ratings and other risk parameters, especially with low-rated bonds.
- Reinvest Your Coupons: Growing your savings is easier when you reinvest the interest you receive.
Conclusion
For any asset class, it is essential for an investor to read up and educate themselves before investing. Bonds are the anchor for your portfolio that you can use to preserve your capital as well as earn regular income. While the options—from Government Securities to corporate issues—may seem vast, a disciplined approach to research and due diligence will serve you well. Start with a strategy that fits your risk appetite, and let the stability of bonds provide the foundation for your long-term wealth creation.
