Types of Bonds available in India

15 Dec 2020  Read 2660 Views

Saving money without having financial goals or aiming for additional returns is usually considered as a waste in today’s times. As a result, people often save to invest and invest to save. 

In the olden days, banks were the safest and probably the only option for them to invest and save their money. 

Over time, things have changed, and people now have a wide range of investment options to choose from. With such a wide array of options available, “where to invest?” is a question that arises often. The situation is such that it seems as if a new investment scheme comes up every day. 

Talking about such options, people choose according to their financial objectives and risk averseness. For example, for a safe investment, people prefer mutual fund schemes and earn returns. 

Then there are options like bonds, in which investors can also earn a predetermined interest while having a fixed income source. Companies and governments offer various bond schemes that allow investors to earn interest according to their financial goals. 

So, let us understand the various types of bonds offered by companies and by the government of India.

Types of Bonds in India

Following are some of the different types of bonds which are available for investment in India:

Zero-Coupon Bond

A zero-coupon bond is purchased at a discount price and does not pay any periodic interest rates to the fundholder. This bond is also known as the pure discount bond. Money invested here does not offer a regular interest rate till the bond gets mature. Annual returns on the principal amount include the face value, and that lump-sum amount is paid to the investor when the bond matures.

Government Securities Bond (G-Sec)

The Government securities bond is a debt instrument issued by the central and state government of India. The government (Central and/or State) issues this bond when it is facing a liquidate crisis and requires funds for the development of the country. Government bonds are likely to be a contract between the government and the investor in exchange for predetermined interest on bonds.

In India, Government bonds fall under the wide range of government securities (G-Sec) and primarily offer long term investment from 5 years to 40 years. Bonds issued by the state government are also known as SDLs (State Development Loans).

In the initial days, most G-Sec bonds used to issue for large investors such as big commercial banks and companies that needed funds for their future growth plans.

The Government of India made government securities for small investors to invest with small amounts in government securities to earn interest with lower risks. 

Interest offered by the government can be fixed or floating disbursed on a semi-annual basis. Most government bonds are issued at a fixed interest. 

                                                                       

Corporate Bond Fund

When a company borrows money from investors for a fixed tenure and offers them a predetermined interest rate throughout the tenure, it is known as a corporate bond.

Suppose, a company that wishes to expand its business for future growth by raising new capital or wishes to start a new project has the option to raise funds by taking loans, debt, or by equity instruments. Instead of taking bank loans or offering shares to the public, the company asks investors to invest money in their company in exchange for a predetermined exchange rate for a tenure. After the tenure, investors will receive the face value of the bond along with the predetermined interest rate.

This bond might be an ideal choice for those who wish to earn a fixed interest rate as a fixed income for the tenure of their investment.

Convertible Bond

A convertible bond is a type of hybrid bond that offers the dual features of debt and equity to its bondholders, but not at the same time. This bond allows investors to convert their bonds into a predetermined number of regular stocks and become a shareholder of the company and gets all the benefits that a shareholder gets. 

The investors get an opportunity to take advantage of both debt and equity instruments after investing in convertible bonds.

Inflation-Linked Bonds

This bond provides protection against inflation and is designed to cut out the inflation risk of an investment. It is primarily issued by the government. 

Inflation-linked bonds are indexed to inflation so that principal and interest rates rise and fall with the rate of inflation.  

Sovereign Gold Bond (SGBs)

This bond is issued by the central government of India for those who wish to invest in gold but do not wish to keep the gold in physical form with them. The interest earned from this bond is exempted from tax. It is also considered as a highly secured bond as it is offered by the government. 

According to RBI regulations, there are various concerns regarding Sovereign Gold Bond for different entities:

  • SGBs up to 4 kg can only be held up by individuals and HUF (Hindi Undivided Family) in a financial year. 
  • SGBs up to 20 kg can be held by the trusts and other relevant entities in a financial year. 

The sovereign gold bonds come with a maturity period of 8 years with a 2.5% interest rate which is to be disbursed periodically. Also, there is no tax on interest earned through SGBs. 

Investors who wish to redeem their investment can redeem it after the first five years, which will only affect the date of subsequent interest disbursal. 

RBI Bonds (The Floating Rate Saving Bonds)

The floating rate saving bonds 2020 (FRSB) issued by the RBI is also known as RBI Taxable bonds. This bond has a tenure of 7 years, and the interest rate keeps varying during the tenure of the scheme. 

The interest rate on these bonds will be reset every six months, the first reset being on January 1, 2021. That means the interest rate will be paid every six months rather than having an option of receiving it at maturity and the floating interest rate can adjust higher when overall rates in the economy go up.

Investment in this bond starts with a minimum amount of Rs. 1000 and there is no maximum limit on investments. Individuals and Hindu Undivided Families are eligible to invest in this bond. The bond shall be repayable on the expiration date of 7 years starts from the date of issue. Premature redemption can also be done for a specified category of senior citizens.  

Interest received from these bonds will be taxed as per the income slab applicable to the investor’s income. 

Final Thoughts

There is a wide range of bonds offered by the government and companies in exchange for predetermined interest. Choosing a bond to invest in can be difficult without having prior knowledge of the field. 

Government bonds might be an ideal choice for those who are looking for lower-risk bonds to invest in. In the same way, corporate bonds also offer higher interest to the bondholder, but higher return always comes with higher risks.  

This is why investors should do their share of research and select a bond to invest in that fulfils their financial criteria and suits their risk tolerance. 

About the Author: Divyanshu kumar | 49 Post(s)

Divyanshu is currently pursuing a Master's degree in Financial economics. Growing up, he has always been interested in codes and numbers which he has gradually learnt to express in words too.

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