In the current gloomy market scene potential investors are shying away from equity and are resorting to fixed income instruments. Among pool of fixed income investments, bonds are considered a good investment product for investors with short-term perspective.
In the current climate, when there is uncertainty over almost every aspect of life, investment is not an exception. The gloomy market scene has led many potential investors to shy away from ploughing their money. In what one can take refuge in such circumstances are fixed income instruments. Fixed-income instruments mainly comprise of company bonds, company fixed deposits, convertible & non-convertible debentures and tax-free bonds.
Bonds can be considered a good investment product for investors who are looking at investments from a short-term perspective. Bonds are generally considered a less risky investment compared to equity and hence many investors who do not have high appetite for risk go for investing in bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and private expenditures. The most important advantage of investing in bonds is that it helps diversify and grow your money.
Mainly, there are two types of bonds i.e., Corporate bonds and Government bonds.
Corporate bonds: Corporate bonds are issued by corporations to raise capital. They are safer than equities. The bondholders get a specified return every period.
These bonds can be of two types.
Convertible bonds: They can be converted into a pre-defined number of stocks as and when required by the investor.
Non-Convertible bonds: Non-convertible bonds are just plain bonds.
Government bonds: Government bonds are issued by Government to finance their activities. In India, the Government bond market size is much larger than the corporate bond market size. They are also known as G-Sec. The bonds’ return depends on the prevailing interest rate. Usually, Government bonds pay a return of 7% to 10%. The maturity can be anywhere between 3 months to 30 years. To buy a government debt is a low-risk activity as long as you deal with the government itself or some other reputable institution.
Zero coupon bonds
Usually, most types of bonds are offered at a fixed interest rate. However, zero coupon bonds do not come with any specific coupon rate or interest rate. They are offered at a discount on the face value, and on maturity, investors get the face value back. The difference between the two is the profit.
By investing in this type of bond, you receive exemption from paying taxes on the interest income as long as you hold the bond or until its period of maturity.
While there are many other types of bonds available in the market, the ones mentioned above are some of the most common ones in India.
The Indian bond market has witnessed a significant growth in the past few years. This is primarily because of its high liquidity nature. In addition, the increasing stability of the stock market has fuelled the growth of bonds. The mood is upbeat and Indian bonds have been able to get more business within a short span of time in recent years. Compared to China, the Indian bond market is stronger and is profitable as well.
However, you are subjected to risk in any kind of Investment, be it corporate bonds or government bonds. Along with numerous advantages, bonds come with fair number of dangers as well some of them being inflation, interest rate risk, default risk, downgrade risk, reinvestment and rip-off risk.
Source: Economic Times