Investing in bonds is a smart way to establish a stable source of income and an excellent way to diversify your portfolio. Ideally, a well-balanced portfolio should include around 30–40% of fixed-income investments like bonds, if we listen to financial analysts.
Since bonds offer fixed interest payments, they’re very suitable for conservative portfolios. Let’s learn in detail how to purchase bonds in India, where, and what to keep in mind.
Understanding Bonds and the Coupon Rate
Bonds are debt instruments issued by various institutes, including governments, corporations, and financial institutions, to raise capital. When you purchase a bond, you lend money to the issuer in exchange for periodic interest and the return of principal at maturity.
But how do you calculate the amount of the fixed interest payments? With coupon rate. It represents the fixed annual interest the bondholder receives. Yield-to-maturity, another essential factor in bond investing, factors in the bond’s market price and capital gains or losses.
The coupon rate is a percentage of the bond’s face value and remains constant throughout the bond’s tenure unless stated otherwise.
For instance, investing in a bond with a face value of ₹1,00,000 and a 7% coupon rate will fetch ₹7,000 as interest per year.
Types of Bonds Available in India
There isn’t just one bond investors can purchase. Bonds come in different types, catering to different needs. Let’s see some common types of bonds before discussing how to invest in bonds further.
- Government Bonds (G-secs): Issued by RBI on behalf of the government, these are considered highly secure compared to other investments.
- Corporate Bonds: Issued by companies to fund operations, these offer higher yields but come with credit risk.
- Tax-free Bonds: Typically issued by government-backed institutions, these bonds provide tax exemptions on interest income.
- Sovereign Gold Bonds (SGBs): A unique investment that tracks the price of gold while offering fixed interest.
- State Development Loans (SDLs): Similar to g-secs, these are government-issued bonds. The only difference is that these pay higher returns due to the higher risk involved due to being issued by state governments.
How to Purchase Bonds in India
You can invest in bonds through various ways in India.
- Investing Through the RBI Retail Direct Platform
The Reserve Bank of India allows individual investors to buy government bonds through the RBI Retail Direct portal. Here’s how:
- Register on the RBI Retail Direct website by providing KYC details.
- Choose from available bonds, including G-Secs, Treasury Bills, and SDLs.
- Make the payment through your linked bank account.
- Receive periodic interest on the bond and your principal at maturity.
- Buying Bonds Through Stock Exchanges
Bonds are available on exchanges like the BSE and NSE. Here are the steps to follow:
- Starting a demat and trading account with a registered broker.
- Browsing listed bonds and selecting the ones matching your investment goals.
- Placing buy orders through the exchange platform.
- Holding bonds in your demat account and earning interest at the stated coupon rate.
- Investing in Corporate Bonds Through NBFCs and Banks
Many Non-Banking Financial Companies (NBFCs) and banks issue bonds to raise capital. You can buy them directly through their investment platforms or through debt mutual funds specializing in corporate bonds.
- Participating in Bond Mutual Funds and ETFs
If selecting individual bonds seems complex, bond mutual funds and exchange-traded funds (ETFs) provide investors with a diversified approach that balances their risk exposure with various coupon rates. These funds invest in a mix of government and corporate bonds, making the process of choosing easier.
Key Factors to Consider Before Investing
- Credit Rating of Bonds
The bond issuer’s creditworthiness plays a big role in the risk factor, making it a crucial aspect of consideration. Agencies like CRISIL and ICRA rate bonds based on the risk they carry.
- Maturity Period of Bonds
The bonds’ maturity period should align with your goals. For instance, short-term bonds (1–5 years) have better liquidity, whereas long-term bonds (10+ years) come with more stable returns and an extended lock-in period.
- Interest Rate Movements in the Market
Bond prices move inversely to prevailing interest rates. When rates rise, existing bonds with lower coupon rates lose value, while new bonds with higher rates attract investors, and vice versa.
If interest rates rise, existing bonds with lower coupon rates may see a price drop, affecting their resale value.
Investors can mitigate this risk by laddering their investments or holding bonds to maturity.
- Taxation on Bonds
Since different bonds are taxed differently, it is better to understand the nuances of each product. It helps investors plan and compute their returns more accurately.
While some bonds, like tax-free bonds, offer exemptions, others may attract capital gains tax or tax on interest earnings.
Conclusion
The process of buying bonds in India has simplified much more in recent times, with newer and more convenient methods available to a much wider audience.
Whether it is government bonds via RBI’s portal, corporate bonds on stock exchanges, or mutual funds through online platforms, investors have a myriad of safe options to choose from.
When they understand the underlying factors and taxes, etc., involved, investors can make strategic decisions that give them an edge, like purchasing new bonds during increased interest rates for higher returns.
