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The bond market in India
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Investments are classified into two kinds to place them:
• Fixed return investments
• Variable return investments
Investments with a fixed return offer a guaranteed return for the invested cash. These investments frequently have a low liquidity lock-in time. Investments with variable returns are susceptible to plug forces, which means that the precise return on the investment is only guaranteed once the investor exits the investment. Equities, mutual funds, gold, and real estate are investments with the variable return.
Bonds are one of the most popular fixed-return investment categories.
What are Bonds?
Bonds are debt instruments issued by a borrower to extend capital from investors or the public at large. Bonds are like loans that mature on a specific date. In return, the borrower pays interest on the terms and conditions mentioned in the bond; the interest is often paid either at specified intervals or on maturity (deep discount bond)
What are the various types of bonds?
Government bodies usually issue bonds in India. Government backing to the bonds provides security to the investor that these bonds will be repaid on maturity. However, other private institutions also are subject to issuing bonds depending on their need.
These are the various sorts of bonds available for investment in India:
1. Central Government bonds:
The Central Government issues these bonds to raise money. The RBI has issued these bonds on behalf of the government. These bonds' primary objective is to cover the government budget's revenue shortfall and finance the fiscal deficit. These bonds are the safest to invest since the government backs them and will pay them back when they mature.
2. Government bonds:
The government issues these bonds to meet their fiscal deficits. These bonds are listed on the stock market. These bonds also are backed by the government, producing them as low-risk investments.
3. Municipal and native authority bonds:
A municipal corporation or an area authority may raise funds to meet funding needs for particular objectives like building infrastructure or public water systems, among others. The best course of action is to rely on the rating and prior investing track record for these bonds, likewise rated by credit rating agencies.
4. Corporate bonds:
These are highly risky bonds; the maturity depends on the company's diary. Therefore, before investing in such bonds, you want to complete learning about the company and its performance.
5. Public Sector bonds:
Highly regarded public sector organizations distribute these bonds to suit their expansion and development goals. Since PSUs fall under the government, these bonds are comparatively less risky. These bonds are typically issued by businesses where the central government holds most of the stock.
6. Tax-free bonds:
Companies like the National Highways Association of India (NHAI), Indian Railways Finance Corporation, HUDCO, and Rural Electrification Corporation (REC) issue these bonds. The interest on these bonds is tax-free in the hands of the investor.
Types of bond markets
1. Primary market:
This is the market where the borrower tactics investors to raise capital. The difficult price of the bonds and the coupon rate is safe as houses at the time of raising money.
2. Secondary market:
Most of the bonds are traded within the stock market. They will be sold depending on when the investor wishes to exit from the bond. However, it's to be noted that the price of the bonds depends on how close the bond is to interest payments. Because the bond nears the interest payment date, its worth goes up. The cost and coupon rate of the bond moves inversely, i.e., if the value goes up, the interest rate goes down. This frequently occurs due to the investor's net return remaining constant from when the bond was issued in the primary market.
For example, the interest will be Rs. 80 if the bond is delivered at Rs. 1,000 with an 8% coupon rate. The interest rate drops to 6.4% if the value increases to Rs. 1,250. The investor continues to get the same amount of interest payment, nevertheless.
How to invest in bonds
It is possible to invest in bonds by using your Demat account. Since these bonds are open for subscription within the primary market, applying for them online is possible. You can also fill out a form and mail it to your broker if you do your trades using an offline broker. The appliance will then be submitted to the issue.
Once the allotments are made, you'll come to know how many bonds you are allotted. The method is similar to equity shares. There is a minimum issue price for bonds, and you can buy them in India at multiples of that price.
For instance, a company bond may have an issue price of Rs. 1,000 and may be purchased in multiples of 5. this suggests the minimum issue is 5 x Rs. 1,000 or Rs. 5,000. Further investments are often made in multiples of 5, i.e., 10,20,35, etc.
Investing in the primary market is easy, and you may do it online using the Demat. Since these bonds are exchanged in the market, you can also sell your bond investment online. In India, bonds are listed on the stock exchange. Although there is little price discovery for bonds, they have low liquidity, which means that an investor may choose to sell these bonds before they mature.
Generally, the worth of bonds goes up as it nears the coupon payment date. So the perfect exit strategy is to sell bonds as they come close to the maturity date to get a higher return than the payment price.
However, in the case of deep discount bonds, the funds could also be locked in till maturity, depending on the terms & conditions of the bond.
A deep discount bond is a bond that is available at a discount where no interest is paid but returns a higher amount on maturity.
For instance, a deep discount bond could also be issued for Rs. 20,000; the maturity price may be Rs. 95,000 after 10 years.
No interest will be paid throughout these ten years, and the investor's account will be directly credited with the maturity amount.
Deep discount bonds can be invested through a broker or a Demat account.
Another way to invest in bonds meanderingly is to purchase debt mutual funds that primarily invest in bonds. These are often found by analyzing the portfolio of the respective mutual funds.
The bond market in India has few players. Its Government bonds and entities dominate it. This provides safety and security of capital. The bond market, however, is highly nascent and still growing. With increasing investor interest, India's bonds can become a fast-growing market.
Now that you know all the types of bonds available to you and how to invest in them, you'll easily add them to your portfolio. Generally, corporate securities offer better interest and returns, but agency security carries minimal market risk. So, thoroughly evaluate your financial position before investing in one.