Multiple versions of information about bonds may leave a potential investor confused. Bonds in reality are simple debt instruments issued by an entity with the promise of repaying the principal and interest at defined intervals of time. Since the interest and principal are paid at the agreed periods, bonds fall under the category of fixed-income investments.
This article is a simplified guide to understanding what are bonds and the practical steps that can be taken to get started with bond investments. Some of the topics we cover include:
Let’s get started and understand the several reasons why bonds are a good investment option.
What is a bond?
A bond is a contract between the borrower and the lender (investor), whereby the borrower agrees to issue a debt instrument to the lender and repay the principal, while also making timely payments of interest at a pre-determined rate. In simple words, a bond is a loan made by a lender to the borrower (issuer of the bond).
Bonds are usually issued by PSUs, government organizations, corporates, and other entities as a way of financing large projects like infrastructure, business expansions, or in some cases for funding working capital requirements.
What are the different types of bonds?
Bonds can be broadly categorized as listed and unlisted bonds and are regulated by SEBI. The ones traded actively on BSE and NSE are listed bonds and typically include bonds from listed companies and government entities. Unlisted bonds are typically issued by private organizations and are not actively traded.
Bonds can further be differentiated based on various other parameters including:
- Interest rates – Fixed/floating or zero-coupon rate bonds
- Purpose – War bonds, Climate bonds
- Priority of repayment – subordinate bonds, senior bonds.
- Issuer – Corporate bond, Government bond, Municipal bond, RBI Bond
- Rating – AAA, AA, BBB, BB, C, D (By agencies like CRISIL, ICRA, CARE based on financial strength of the issuer)
- Others – Perpetual bonds, Inflation-indexed bonds, bearer bonds, convertible bonds, and sovereign-gold bonds.
The fundamental components of a bond regardless of how it is differentiated remain similar. The three major components include the principal, coupon rate, and maturity.
Why is it recommended to invest in bonds?
- Diversification – Bonds are a good way of diversifying the portfolio and protecting capital for those with low-risk appetites.
- Low risk – The risk associated with bonds in comparison to equities is lower. Most of the bonds are secured in nature and are backed by some form of collateral.
- Regular receipts – Bonds provide a fixed stream of income with regular interest payments.
- Low default – Bonds issued by the government have a low chance of default and are generally secured by collateral.
The primary and secondary bond markets of India are massive and as of January 2023 aggregate to about $1.8 trillion.
How to invest in bonds in India?
Multiple questions about investing in bonds in India have either been left unanswered or are plagued by unambiguity. Here is a clear guide to buying bonds online.
Listed Bonds are issued in the primary market when an entity looks to raise funds for the first time. But to buy/trade already issued bonds, individual investors should do so in the secondary market.
Investors with the clarity of holding a bond until maturity can buy a bond from the primary market itself.
Various ways through which bonds can be bought are:
NSE goBID
An investor interested in buying government bonds, treasury bills, and G-Secs can visit NSE goBID, complete KYC, and submit necessary documents like PAN, Aadhaar, demat, and bank details. The G-Sec units will be credited directly to the demat account of the investor upon completion of payment. The NSE goBID is managed by the Government of India and ensures secure transfer of data and funds.
Brokerage Houses
The best way to easily access listed bonds in India is to contact your broker and enquire about active and upcoming bond issues. Brokerage houses like Zerodha, Upstox, AngelBroking, and Groww provide highly rated PSU and corporate bonds.
Online Platforms
Multiple online platforms provide retail investors an option to open a trading account for free with minimum investment as low as Rs 1000 and participate in listed bond market. These platforms offer MLDs, government securities, and corporate bonds with offer documents specifying details of the bond and the ratings. Examples of such platforms include indiabonds.com, goldenpi, and more.
RBI Direct
RBI Retail Direct scheme is another avenue for individual investors to buy government securities by opening a ‘Retail Direct Gilt (RDG) account with RBI. The investor can place orders to buy T-Bills, Sovereign Gold Bonds, and bid for first-time issues from the primary market. On due dates, the bank account of the investor is credited with interest and maturity proceeds.
Jiraaf
Jiraaf is an online platform to invest in alternative-fixed income investments. One can easily buy curated unlisted corporate bonds of great private organizations on the platform. Opportunities that go live on Jiraaf undergo a rigorous due diligence process before being made available to investors. All information is transparently made available to investors to evaluate risk and return before undertaking an investment.
Conclusion
Diversify your portfolio by investing in different investment avenues including bonds. Bonds are considered a safe haven for investors due to their low-risk nature compared to equity products, and their ability to preserve capital and generate regular income. In the event of a bond default due to the borrower’s inability to pay back the investors, bondholders, who are creditors of the company, have a higher priority compared to equity shareholders. For all the right reasons, buy bonds!
