What are Bonds?
Bonds are debt instruments where lenders lend money to bond issuers. At the end of the bond tenure, the bond issuer guarantees to pay back the borrowed amount and interest at regular intervals.
Bonds are issued by banks, private or public companies, the government, and non-banking financial companies. These low-risk investment options provide a good diversity to an investment portfolio. This guide will teach you how and why to invest in bonds and other critical information.
How to Buy Bonds?
Investing in bonds can generate a secondary source of income and create a well-balanced investment portfolio to protect you from stock market volatility. Thanks to bond investments, you can reduce risk and diversify your portfolio.
Bonds can be bought in the primary and secondary markets.
- Primary bond market: Where the investor and the bond issuer deal with each other.
- Secondary Bond Market: Where investors trade bonds issued and bought through the primary market.
Previously, investing in bonds was time-consuming, and the process was complex. Investors were required to select from the limited bond options available with the broker. They also have to submit documents and sign papers to get the bonds. One would hold the bonds in their demat account or get a bond certificate. Technological advancements have made the bond investment process extremely fast and paperless.
For instance, in the primary bond market, one must fill out a form and submit it with the relevant documents. After allotment, the bond will reflect in the demat account. On the other hand, in the secondary bond market, one can easily purchase or sell available bonds.
Why Invest in Bonds?
Diversifying a portfolio is one of the first rules for any prudent investment strategy and the second rule is to safeguard your wealth. Bonds offer the security and portfolio diversification opportunity that you are seeking. Bonds can be a good starting place if you are a newbie in the investment world.
Investing in bonds provides a predictable income stream. In most cases, interest is paid twice a year. If you can hold your bonds till the maturity date, you will get the entire principal amount. Therefore, this investment is considered the perfect way to preserve your capital.
Additionally, bonds can offer offset exposure to the volatile shareholdings you might have. You can expect a steady income stream through bond investments, which can provide you with security in your portfolio.
How to Buy Corporate Bonds in India?
Companies issue corporate bonds to raise capital for research, development, and expansion initiatives. Corporate bonds offer higher yields, but the interest earned is taxable.
You can buy corporate bonds in India on the primary market through banks, brokerage firms, brokers, or bond traders. Some corporate bonds are also traded on the over-the-counter market and provide good liquidity.
How to Buy Municipal Bonds in India?
States, towns, or cities issue municipal bonds to raise money for public projects like hospitals, roads, and schools. General obligation and revenue are the two types of municipal bonds. The interest earned from these bonds is tax-free.
- General obligation bonds fund projects that do not produce income, like parks and playgrounds. These bonds are backed by the full credit and faith of the issuing municipality.
- Revenue bonds pay back investors with the income that these bonds are expected to create. For instance, revenue bonds might be issued to finance a new highway.
You can purchase municipal bonds in India through banks, bond dealers, and brokerage firms. In a few cases, you can buy them directly from the municipality. These bonds are traded in the primary and secondary bond markets.
How to Buy Government Bonds in India?
The government directly issues government bonds. Since the Government of India backs them, these bonds are highly secure and have a low-interest rate. The bonds offered by the government are classified as follows:
Fixed-rate bonds yield a fixed interest rate. Even if market rates fluctuate, the predetermined rate will be applicable. While you might get low returns, you know your investment is safe.
The interest rates on the bonds change according to the highs and lows of the market. You stand to gain if the market fluctuations veer toward the positive side. You stand to lose if the market fluctuations are toward the negative side.
Investors can buy government bonds in India from stockbrokers or participate in NCB or non-competitive bidding. Another option is a direct investment; you need to create a trading account and a demat account with a brokerage house. Once you acquire them, you can purchase and sell government bonds.
How to Buy Bonds and Invest in them?
1. Buying Bonds Through a Broker
Bonds can be bought through a broker in the same way as stocks are purchased. But the fees might widely vary, and it can be daunting to research all possibilities because each company might offer dozens of different bonds. Moreover, one needs to assess the bond issuer to ensure they can repay the bond obligations.
2. Buying Bond Mutual Funds and ETFs
If you want to save a great deal of time and effort, you can invest in bonds through ETFs and mutual funds. When you purchase an ETF (exchange-traded fund) or a bond mutual fund, there’s no need to decide which bond you will purchase. The ETF provider will choose the bond on your behalf and even categorise them by duration or kind. Therefore, this is one of the easiest ways of investing in bonds.
3. Buying Bonds Through RBI Retail Direct
Through the Retail Direct scheme, individual investors can invest in Government bonds. In this scheme, individuals must register with the RBI for a Gilt Securities Account, called RDG or Retail Direct Gilt. RDG account holders can partake in the primary issuance of SG/CG/SGB/T-bill.
Tips for Investing in Bonds
- Bond Maturity: Before investing in bonds, it is critical to determine how long your money will be locked up. That’s where you need to find out about the bond maturity day. It is the day when you will get back your investment amount.
- Bond Ratings: The creditworthiness of a bond can be determined by its rating. If the rating is low, there’s a higher chance of capital loss and default. AAA is the highest rating for a bond. If the bond has a credit rating of C or lower, its quality is bad, and the chances of default are higher.
- Bond Yield: The return expected from the bond investment is known as bond yield. The returns are higher in bonds with low ratings because they are riskier than high-rated bonds. Bonds with low ratings have a higher yield, and bonds with high ratings have a lower yield. Therefore, you must consider the bond yield and ratings before choosing an investment bond.
- Bond Issuer: The credibility and track record of the bond issuer is critical. Therefore, knowing the history of the company can assist you in deciding whether you should invest in its bonds.
- Investment Objective: For diversification, bonds are thought of as a good investment option. Therefore, you must analyse your investment objectives and revisit asset allocation strategies before bond investment. Additionally, there is a wide range of bonds available, and you need to pick the one that perfectly suits your investment profile and meets your investment objective.
- Risk Tolerance Level: The risk tolerance level significantly impacts the type of bond one will choose. You might consider investing in bonds with low ratings if your risk tolerance is high. If your risk tolerance level is low, investing in bonds with a high credit rating is much more suitable. So, it would be best if you considered your risk appetite before investing in bonds.
- Macroeconomic Risks: Bonds lose value as interest rates go up. The risk of interest rates changing before the bond’s maturity date is known as interest rate risk. It is impossible to predict the interest rate movements. Thus you should avoid trying to time the markets. Instead, concentrate on your long-term investment goals. Bonds are also highly sensitive to inflation.
- Bond Prospectus: It is critical to read the bond’s prospectus. It will provide you with a thorough understanding of profile allocation. Before investing in bonds, it is recommended that you understand the different bond types and the fee structure. The name of the fund might only imply a certain part of the allocation. For instance, government bond funds might sometimes hold non-government bonds. So, you need to have a deeper understanding of the bonds and gather all the necessary information before making the final decision.
- Broker: Are you purchasing individual bonds? If so, you need to choose a broker or platform like Yubi that clearly understands how to invest in bonds. Understanding the commission and fees associated with bond investments is also important. Do not hesitate to seek a breakdown of all the costs before going ahead with your decision.
What are the Benefits of Investing in Bonds?
- Preserving Capital
Preservation of capital means safeguarding the value of your investment through assets that guarantee the return of principal. If you have less time to recoup losses, these assets can be a great choice for investors. Typically, bonds are less riskier than stocks.
- Generating Income
Even when the rates are low, investors can use many options to build a strong portfolio that meets their income needs. Several investments offer some form of income, but bonds typically provide the most stable and highest cash streams. These might include emerging market debt or high-yield bonds.
You earn a fixed income at regular intervals when you invest in bonds. It might be in the form of coupon payments.
Investment in bonds, a balance of stocks, and other asset classes will help you build a portfolio that seeks returns but must be resilient across all market environments. Bonds and stocks typically have an inverse relationship, which means that bonds become more appealing when the stock market is down.
- Risk Management
Compared to stocks, fixed income carries a lower risk. It is because fixed income assets are typically less sensitive to macroeconomic risks like geopolitical events and economic downturns.
- Invest in a Community
When you are investing in municipal bonds, you are giving back to the community. Although these bonds might not provide the higher yield of a corporate bond, these bonds are used to help build schools, hospitals, or parks that can enhance the standard of people for many people.
Pros of Investing in Bonds at Yubi
- Invest in different types of bonds on the same platform. Individuals and retail investors can directly purchase bonds on this platform.
- The platform provides discovery, transaction and portfolio management services across different bond products.
- Reliable platform where thousands of crores of transactions from institutions and individuals have been covered safely and securely.
- Fast process and easy access are the notable features of the Yubi Invest platform. In just a few clicks, you can buy and sell bonds.
- Yubi makes it hassle-free for bond issuers to add bonds for sale and handle their portfolio.
Where can I Buy Bonds?
Municipal bonds are traded in the primary and secondary markets. Investors can buy them through banks, brokerage firms and bond dealers.
Government bonds can be bought in different ways, such as direct investment, Gilt mutual funds and RBI Retail Direct.
Investors can also buy bond ETFs, which are passive investments and have a lower cost compared to active funds. They are traded like stock ETFs on exchanges. If you want to directly invest in bonds, you can buy them via platforms like Yubi.
Yes, you can invest in bonds with Yubi. The platform connects investors and bond issuers. You can find all types of bonds on this platform and can safely make your decision after comparing them. Moreover, you can also sell bonds on this platform in just a few clicks.
You can directly invest in bonds by creating trading and demat accounts with a brokerage house. Once you have these accounts, you can buy and sell bonds. You can also register on the Yubi platform to purchase and sell bonds in a few clicks.
Bond investment is safe and reliable, but you can still lose money on a bond. The bond prices go up and down for several reasons, but the most impactful change is its interest rates. It would be best to research before buying and selling bonds to decrease your losses and improve your income generation opportunities.
Bonds are considered a reliable and good investment option. They provide regular income but are considered to be a stable investment option. So, you can invest your money and know it is safe.