Various types of bonds in India – Benefits and Risks

Bonds in India - benefits and risks

Overview about Bonds in India

Bonds are the debt security where an issuer is bound to pay a specific rate of interest agreed as per the terms of payment and repay principal amount at a later time. The bond holders are generally like a creditor where a company is obliged to pay the amount.  The amount is paid on the maturity of the bond period. Generally these bonds duration would be for 5 to 10 years.

There are various types of bonds in India:

1)   Government Bonds: These are the bonds issued  either directly by Government of India or by the Public Sector Units PSU’s in India. These bonds are secured as they are backed up with security from Government. These are generally offered with low rate of interest compared to other types of bonds.

2)   Corporate Bonds: These are the bonds issued by the private corporate companies. Indian corporates issues secured or non secured bonds. IIFL bonds issue which came up during Sep-2012 was unsecured bond and Shriram city union bond issue in Sep-2012 was a secured bond issue.

3)   Banks and other financial institutions bonds: These bonds are issued by banks or any financial institution. The financial market is well regulated and the majority of the bond markets are from this segment. However care to be taken to consider the credit rating given by credit agencies before investing in these bonds. In case of poor credit rating, better to stay away from such bonds.

4)   Tax saving bonds: In India, the tax saving bonds are issued by the Government of India for providing benefit to investors in the form of tax savings. Along with getting normal interest, the bond holder would get tax benefit.

In India, all these bonds are listed in National Stock Exchange and Bombay Stock Exchange in India, hence they can be easily liquidated and sold in the open market.

Benefits of investing in bonds in India:

1)   The secured bonds issued by corporate offer highest security compared to normal corporate deposits. Also these bonds are offered at higher rate of interest compared to bank fixed deposits. Recently Shriram city union secured bonds offered 11.75% per annum which was one of the best investment options.

2)   The tax free bonds offered by Govt. of India offers tax exemptions along with normal rate of interest.

3)   Investor can invest in high credit rated bonds issued by bank or financial institution bonds.

Risks of investing in bonds in India:

1)   Majority of the bonds offer low rate of interest compared to other investment options like bank fixed deposits etc.

2)   The rate of interest of tax saving bonds is relatively low or same compared to other tax free instruments like PPF, NSC etc.

3)   There are unsecured bonds issued by the corporates where the investment would be at high risk.

How you can buy these bonds:

You can buy these bonds by opening an account with any of the brokers like etc. However all the bonds would not be available for investment all the time. For e.g. tax saving bonds are usually issued during the financial year end where an investor would be looking for tax saving instruments for investment.

Who can buy these bonds?

Investors can buy corporate bonds which offer high interest rates. However investing in SECURED bonds would be better option. Investors who do not want to take risk and look for capital protection can buy Govt. bonds. Also when interest rates are falling, investing in bonds would be better option as other investment options offers lower returns.

Readers, have you invested in bonds in India ? Please give your comments

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Suresh KP

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