What is a Bond?
A bond is a popular variant of debt instruments or securities issued by borrowers to raise funds from investors willing to lend money for a specific time. Basically, when you buy a bond, you lend to the issuer – a government, municipality, or corporation. In return, the bond issuer pledges a specified interest rate to be paid to you during the bond’s life.
The principal, also known as the face/par value of the bond, is repaid to the investor by the borrower after the bond reaches its maturity after a set period. Moreover, bond prices fall or rise according to the market’s condition. However, bond prices are significantly different from stocks and mutual funds.
Bond investments are used to finance projects and operations by companies, municipalities, states, & sovereign governments. These financial instruments significantly diversify the investment portfolio of investors and reduce liquidity risk. Different bond types have different bond tenure.
How do Bonds Work?
✓ When companies/businesses need to raise funds to finance new projects, maintain ongoing operations, etc., they may provide entities with newly issued bonds. The primary issuance of bonds is how the investment process starts.
✓ The issuer/borrower issues a bond that includes the loan terms, interest payments, and maturity date. The bond issuer promises to pay the investor a specific rate of interest during the bond’s life and repay the principal when the maturity date arrives.
✓ The investors willing to lend money for a specific period buy those bonds.
✓ The initial price of most bonds is typically set at face value per individual bond.
✓ The bond’s face value is paid back to the borrower once the bond matures.
✓ Besides the face value, the interest payment is part of the return that investors earn.
✓ Bonds can also be sold by one investor (bondholder) to another investor before it reaches maturity.
Different Types of Bonds
Here are some of the most common variants of bonds:
Capital Gains Bonds
These bonds allow you to transfer your gains from long-term assets (such as land & house property) into specific bonds. This bond will offer you tax exemption from Capital Gains Tax under the Income Tax Act.
Bonds issued by the federal government or central and state Governments are called Government security. They are among the safest investment options to earn periodic interest based on the interest rate and principal on maturity.
These are bonds issued by various corporations for their financing needs, i.e., to raise money and carry specific credit risks. The bondholders earn regular interest income and principal amount at maturity, and these bonds also pay higher interest than others, such as Bank FDs and Government bonds. This type of bond may offer a tenure of 15, 20 or 25 years.
In such a bond, both principal amount and interest payments are indexed to inflation. As opposed to other bonds which facilitate to raise money, inflation-link bonds protect investors from inflation.
This bond allows its holder to convert the bond into equity based on particular specified terms. Convertible bonds can have a lower durative as compared to conventional bonds.
Sovereign Gold Bond
The Government of India also issues Sovereign Gold Bonds. Gold bonds are in the form of security in the form of the Government of India stock.
This bond enables resident citizens/HUF to invest in a taxable bond without any monetary ceiling.
Besides this, other forms of individual bonds include non-government bonds, municipal bonds, revenue bonds, treasury bonds, investment grade bonds, treasure or t bonds, etc.
Tax-free bonds are issued by a government entity to raise funds for a specific purpose. They come with a long-term maturity of 10, 15 and 20 years. The interest paid by tax-free bonds is exempt from income tax.
Fixed Income Bond
Fixed Income bonds provide investors with a stream of fixed periodic interest payments and the eventual principal return upon maturity.
A debenture is a type of bond that is unsecured by collateral and carries a higher interest rate. They rely on the reputation and creditworthiness of the issuer.
Commercial paper is a short-term unsecured debt security issued by financial institutions and other large companies. They are sold at a discount, meaning the investor pays less than the face value of the security.
Perpetual bonds are bonds with no maturity date. Holders of perpetual bonds receive interest throughout.
Benefits of Investing in Bonds on Yubi
The bonds benefit investors (who buy bonds) and borrowers (who issue bonds).
The benefits are:
- Source of Income – Bond investment provides a predictable income stream – bonds pay interest twice a year. Thus, bond investments can save investors from facing any significant financial risk.
- Provides a saving platform – The investor gets back the total principal amount if the bond is held back till maturity, so bonds are a way to preserve capital while investing.
- Best Investment option – Bonds are generally regarded as lower risk than equities, and investors in bond funds are usually less exposed to volatility.
- Interest earned is not taxable – The interest earned from municipal bonds is mainly exempted from taxes.
- Improves Cash flow – Bonds offer significantly improve investors’ flow of revenue. Companies, governments, and municipalities issuing bonds benefit by raising money for various purposes.
Advantages of Bonds
When it comes to bond investments, there are numerous advantages that these debt instruments offer. Here are some of the most prominent ones:
Higher Interest Rates
Bonds feature coupons or higher rates of interest as opposed to deposits. Moreover, the coupon is delivered on a regular basis during the bonds’ tenure.
Easy to Sell
Bondholders who no longer wish to keep their bonds can sell them to other interested individuals. Whenever a bondholder sells their bonds at a higher price than what they paid to purchase them, they earn capital gains.
Bonds are perfect for usage as collateral when applying for a bank loan.
The issued bonds’ security is guaranteed by the law, which bounds borrowers to repay the principal along with the coupons.
Why You Should Buy Bonds on the Yubi Invest Platform?
Bond platforms enable retail investors & individuals to buy bonds directly. The bond platform of Yubi Invest offers discovery, transaction, and portfolio management services across multiple bond products.
Transactions of thousands of crores from both individuals and institutions, covering around half of the covered bonds originated in the country, have been facilitated using this platform.
The most significant advantage of the Yubi bond platform is its easy access and fast processing. Using this platform, investors can buy and sell bonds quickly in just a few clicks. Issuers can also handle their portfolio and add bonds for sale within minutes.
✓ For investing – Yubi Invest is a tool for investing and liquidating fixed income securities. It allows you to find multiple fixed incomes (both primary and secondary trades) on a single platform. It also provides a complete history of the bonds, yield offered, and capability to place bids.
✓ For selling bonds – Both primary & secondary bonds can be issued on the Yubi Invest platform and match its diverse pool of investors.
What are Some Tips for Investing in Bonds?
Every entity or individual who wishes to invest in bonds should keep the following tips in mind:
- Know when the bond matures – The day on which a bond investor receives their invested amount back is called the maturity date. Every investor should know how long their money will be locked-up before they invest in bonds.
- Assess the bond ratings – Investors can determine bonds’ value by their rating. The highest bond rating is AAA, whereas the lowest0quality ones hold a “C” rating. Every investor should assess the rating of bonds before investing to ensure maximum returns.
- Determine the credibility of the bond issuer – Irrespective of which method an investor is opting for to purchase bonds, it is crucial that they check the issuer’s credibility by looking at their track record and history.
How to Invest in Bonds in India?
There are numerous ways following which interested individuals can buy bonds. For starters, they can either buy bonds from the primary market, where the bond issuer and investor deal directly with one other, or from the secondary market, where investors can trade issued bonds as well as those bought from the primary market.
Here are three of the most common ways to invest in bonds in India:
Through a Broker
In this method, buying bonds is similar to buying stocks. However, one significant difference lies in the fees charged by the broker. Moreover, researching all the other possibilities. such as bond options, which may be tedious.
Purchasing Bond Mutual Funds and Exchange-Traded Funds (ETFs)
This is one of the simplest methods of investing in bonds. It not only saves time and effort but also saves investors from the hassle of choosing which bonds to buy since the ETF provider handpicks the bonds for them.
Through RBI Retail Direct
Individual investors also have the option to invest in government securities via RBI’s Retail Direct Scheme. As per this system, the individual must register for a Gilt Securities Account with the Reserve Bank of India called “Retail Direct Gilt (RDG).”
Click here to learn more about how to invest in Bonds.
How to Make Money from Bonds?
There are mainly two ways following which investors can make money using bonds. Here is a detailed look at both of them:
By Holding Bonds
One of the most popular ways which facilitate investors to earn profits is by purchasing and holding bonds. By holding the bonds until their maturity date arrives, investors can retrieve interest payments on them. In most cases, the interest on a bond is paid twice a year; thus, most investors choose to opt for this method to make money.
By Selling Purchased Bonds
Another way to make money from bonds is by selling purchased ones at a higher value than their cost price. Many investors sell their bonds when the bond prices rise.
The Bond Market in India has transformed post-liberalization. This opening up of the financial market has influenced foreign investors to invest in the Indian bond market. Further, the bond market in India has diversified to a large extent, which is a massive contributor to stable economic growth.
Corporate bonds are debt securities sold to investors by corporations to raise finance for their operations. Repayment is made in total principal or interest earned over some time. However, these bonds are different from stocks.
These bonds are legal contracts that require the corporation to repay the borrowed money with interest at fixed intervals. Further, they offer a higher interest rate than government bonds.
Covered Bonds are a variant of corporate bonds. These bonds are a hybrid between asset-backed securities/mortgage-backed securities & standard secured corporate-based bonds. These bonds are primarily used by mortgage lenders that act as a tool for refinancing.
An efficient corporate bond market enables companies to raise capital in the primary market and help investors trade in and out of risks in the secondary market. The growth and development of the corporate bond market also foster economic development.
To avoid being cheated, corporate bonds registered with the SEC should be bought by investors. It is advisable to avoid investing in all non-registered bonds.
Bonds should be the investment choice of individuals who do not wish to experience or live with the stock market risks and volatility. Unlike the stock market’s ups and downs, bonds are a safer investment and diversify any individual’s investment portfolio.
You can redeem or cash in your savings bonds by visiting the bank where you hold a local account.
Bondholders are simply loaning money. Therefore, they don’t have ownership in the company and cannot receive dividends.
Two regulators regulate bond markets in India because bonds are corporate and government debt instruments.
- RBI or the Reserve Bank of India
RBI regulates and facilitates government bond funds and other securities on behalf of governments. From the overall government debt management point of view, RBI regulates bond markets and keeps a tab on the debt program’s impact on the economy’s yields and interest rates.
- SEBI or Securities and Exchange Board of India
SEBI regulates corporate bonds, both private sector and PSU (public sector undertaking). It focuses on maintaining the integrity of the trading mechanism and ensuring the investors’ interests are protected whilst they are aware of the risks.
Bonds can be secured or unsecured.
Secured bonds are backed by an asset clause, which can be in the form of machinery, property, plants, or stock. These bonds imply that if the issuer defaults upon its coupon or principal payment, the bondholders have the option to stake a claim on the assets that are backing the bond.
Unsecured bonds are also called debentures; an asset clause does not back them. So, if the issuing company goes bankrupt or defaults on its payments to its shareholders, the interest payment and repayment of the principal amount are not guaranteed to the shareholders.
No, bondholders cannot receive dividends on bonds because they are loaning money and don’t have ownership of the company.
Corporate bonds are a form of debt financing. They are a significant source of capital for many businesses, along with bank loans, equity and lines of credit. Corporate bonds are often issued to secure ready cash for projects a company plans to undertake or to fund expansion plans.
Corporate bonds are a flexible way of raising capital and can be secured or unsecured. As a result, they can stabilise a company’s finances. As for investors, these bonds are perfect for risk-averse investors seeking high returns on their investments. The top corporate bond funds typically range between one and four years.
The bond market is essential to the economy because it provides an alternative source of finance and supplements the banking system to meet the government and corporate sector requirements to raise funds for long-term investments.