Bonds and debentures 101: A starter's guide with types

Bonds, issued by governments and corporations, offer stability and periodic interest. Various types provide unique advantages, diversify portfolios, and reduce risks.

Bonds are debt securities to a private or government entity that pays periodic interest and returns the principal at maturity. They offer bondholders a relatively stable and predictable way to earn money. The bond market in India has evolved significantly, providing investors with various options. ICICI Bank, Axis Bank, Aditya Birla Group, HDFC Bank, and the government offer various corporate and government bonds.

This article will discuss the types of bonds, their features, advantages, and how to invest in bonds in India. Let's dive in!

Highlights:

• Bonds are debt securities that offer a relatively stable and predictable way to earn money.

• Bonds can be a good way to diversify your investment portfolio and reduce future financial risks.

• To invest in bonds in India, you need to open a Demat Account and select the kind of bond you want to invest in.

Also Read: Importance of bonds in your portfolio

Types of bonds

1. Fixed-Rate Bonds: These bonds give a fixed coupon rate for the entire period until the bond matures.

2. Floating Rate Bonds: These bonds offer varied coupon rates during the tenure of the investment. 

3. Zero-Coupon bonds: These bonds do not have any coupon rates. Rather, they are sold at a discount to their face value, and the difference between the purchase price of the bond and the face value is calculated as the interest earned. 

4. Callable Bonds: These bonds come with a provision that the bondholder can withdraw the bonds before the scheduled maturity date according to their will.

5. Puttable bonds: The bondholder can sell the bonds back to the issuer at a particular price before the date of maturity. It's an exit strategy for the investors if they want to access their investments early. 

Features of a bond

• The principal amount that the borrower receives at the time of maturity is the face value.

• The date when the borrower repays the principal sum to the bondholder is the maturity date.

• A fixed or variable interest rate is paid to the bondholder regularly, called a coupon rate.

• The bond issuer is a private or government entity issuing the bond.

• YTM (Yield to maturity) is the total sum expected to return to an investor if the investment is held till maturity.

Also Read: Are bonds safer than stocks?

 Advantages of bonds

• Bonds are a regular source of income.

• Government bonds are considered a 'safe investment.'

• Bonds can diversify your investment portfolio, reducing future financial risks.

• Many entities return the principal amount at maturity, offering capital reserves. 

• You can get tax benefits if you invest in bonds. 

How to invest in bonds in India?

• To invest in bonds in India, you must open a Demat account.

• Select the types of bonds you want to invest in. 

• Purchase your bonds and track your investments. 

• You can hold onto your bonds till they mature or redeem them before maturity. 

Find the latest article on mutual funds here.