Must-Know Advantages Of Bonds

Bonds are one of the most secured investment options, wherein an investor loans finance to the issuer. The issuer can be the Government of India, a municipality, authorised companies, or NBFCs, which borrows funds for a specified term duration at a fixed rate of interest. The issuer repays the principal, also known as the par value or face value, at maturity and pays a specified interest periodically. 

Why Do Investors Buy Bonds? 

• A Safe Haven For Investment

While investing in the stock market may sound tempting because of attractive returns, there is always a substantial risk of losses. Bonds, on the other hand, are always a safer investment option than equity shares. Debtholders, by design, have the upper hand over shareholders. For example, when a company faces a severe financial crisis or goes bankrupt, debtholders are always paid ahead of shareholders. In worst-case circumstances, the debtholders/creditor can at least recoup a certain portion of their investment. In contrast, shareholders will have to face the brunt and may lose their total investment based on a company’s liquidated assets.

• Risk-free Investment

Bonds issued by the Government of India are a risk-free investment instrument. Even though the yield from such is not as high as in equity shares, investors can rest assured that their capital remains preserved. The par value of bonds raised by the Indian government remains unaffected by market fluctuations. What makes such bonds risk-free is that the government backs these bonds, and there are negligible chances of government default.

• Diversity

Investors looking to diversify their portfolio can utilise a share of their corpora to buy bonds. There are several types of bonds in the market catering to different investors’ requirements, each for specific purposes. Investors can choose from among the various kinds of bonds via platforms to minimise volatility and secure a steady income source.

• Predictability And Security For Retirees

Retirees most often rely on a predictable source of income, which bonds offer. The return may not be as high as other investment portfolios but plays a significant role for retirees. As bonds are a long-term investment option, the returns are steady, certain, and predictable. 

• Better Yield Than Deposit Accounts

When money is deposited in a savings account, investors earn interest at a specific rate. However, the interest rates of bonds are comparatively higher than that of deposit accounts. If the money is not needed in the short run, bond investments are wiser since it earns one better returns with marginal risks attached.

• Tax-saving

Certain bonds offer tax-free investment returns. Not only is the principal free from tax, but the interest payment is also tax exempted. Thus, investors falling under the higher tax bracket can consider tax-free investment options such as bonds. 

• Legal Protection

Investors buying bonds also enjoy legal protection as outlined by the RBI. They come with indentures and covenants that specify the rights and duties of issuers and bondholders, such as issuers’ obligation or prohibition regarding the bond. 

Bonds: Types In India

There are mainly three major categories of bonds in India:

• Government Bonds

These are debt instruments issued by the Indian government to raise funds for government expenditures, such as socio-economic infrastructural development projects. Government bonds are long-term risk-free investment options ranging from 5 years to 40 years, issued under the Reserve Bank of India’s supervision. 

Multiple options of government bond investments are available – Sovereign Gold Bonds (SGBs), Zero-Coupon Bonds, Inflation-Indexed Bonds (IIBs), Floating Rate Bonds, and Fixed-Rate Bonds, among others. To boost the bond investment market, many online partners now offer such investment options. Investors can now buy SGBs online through reliable digital platforms, offering maximum safety and easy investment options.

• Municipal Bonds

Muni bonds or municipal bonds are debt investment obligations, wherein Urban Local Bodies and municipalities issue bonds to fund infrastructural development projects or urbanise a particular part under their jurisdiction. The issuer makes the repayment from the money generated by such development projects or tax revenue. 

• Corporate Bonds

Corporate bonds are debt instruments issued by a company. The company uses such funds to finance business operations, purchase new machinery, expand business or meet other business requirements. The company repays the principal when the bond matures and pays interest periodically.

Bottom Line

Bonds offer several advantages over equity shares, of which security and consistency in returns are two of the most notable ones. It is also a suitable choice for diversifying a portfolio mainly comprising stocks since bonds dilute the associated risk. Nevertheless, it would help if you considered factors like investment objective and horizon to zero in on the ideal bond. Compare different options on platforms and invest directly through it.