You can create additional income by investing in bonds. It is one of the most reliable options to diversify your portfolio. Bond investment is also considered less risky than stocks as bonds provide reliable income. Although stocks tend to offer higher returns, they also carry more significant risks. But bonds provide you with safety in addition to interest. Governments and companies typically issue bonds to raise money from investors for specific purposes. You will receive interest during the bond period, and you will get back the investment amount at the bond's maturity. You can invest in Treasury bills and corporate and government bonds. AAA bonds are the highest-rated and safest bonds.
Did you know? Corporations and government entities issue bonds with a promise to repay their investors with interest.
Categories of Bonds to Invest in India
There are different categories of bonds in India. Based on their types, bonds have distinct characteristics. To invest in any of these bonds, you need to be aware of the different categories of bonds. You will also get guidance if you want to know how to buy bonds.
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Corporate Bonds
Companies issue corporate bonds to raise funds from investors. These are issued in two markets: the primary and secondary markets. The primary market is where bonds are sold for the first time, and the secondary market is where bonds are traded. Certain factors, including interest rates, demand and supply, and other significant characteristics, help determine the value of bonds.
They issue bonds to raise money for expansion, research, and development. You will have to pay tax on the interest you earn on corporate bonds. To invest in corporate bonds, you will require a Demat account to have your bonds deposited after purchase.
Also Read: A Brief About the Format, Meaning, and Use of a Cash Budget
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Government Bonds
The government also issues bonds from time to time. The government raises funds for the development of the state by issuing bonds. You need to know how to buy government bonds for government bond investments. These are as follows:
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GILT Mutual Funds
Buying GILT mutual funds is one of the most accessible options for purchasing government bonds. These mutual funds primarily invest in bonds. GILT funds are also more reliable as they invest in government securities.
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Direct Investment
To invest in bonds through direct investment, you need to have a Demat and trading account with a broker agency. You can sell and purchase bonds of your choice through this account.
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RBI Retail Direct
RBI retail direct also offers another opportunity for investing in bonds. You can invest in government bonds directly through RBI retail. But you will need a direct gilt account to invest in bonds. You can open an account by visiting the RBI Retail Direct Website. After that, you will have to give all the required details and follow the guidelines mentioned on the website. One of the benefits of investing in bonds through an RBI retail direct account is that you do not need to pay any fee to open and maintain performance.
3. Municipal Bonds
Municipal corporations issue municipal bonds in India. These local government bodies raise funds for various developmental projects, including building roads, hospitals, educational institutions, etc. The maturity period for municipal bonds is three years. However, the Security Exchange Board of India issued guidelines in 2015 regarding the issuance of municipal bonds.
The guidelines are:
- The municipal body should refrain from defaulting on loan repayment.
- It should have a healthy net worth three years before the issuance of bonds.
- The name of the municipal body and its directors should not be on the list of defaulters published by the Reserve Bank of India.
Also Read: What Is the Business Life Cycle and Its Phases?
Valuable Tips for Investing in Bonds
Some tips will help you to invest in the correct type of bonds. It would help if you focused on the following points:
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Choose a High Rated Bond
There is a rating for every bond. The top rating for bonds is AAA. The lower rating indicates high risk, and the higher rating means that the bond is safe to invest in. Usually, the rating of a bond ranges from AAA to D. Any rating below C is considered a low rating. Low-rated bond investments may lead to a significant risk of losing money.
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The Maturity Period
After the end of the maturity period, you will get back your investment amount. Therefore, you should know the maturity period. It will help you decide whether to hold your investment for such a period.
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Examine the Background of the Issuer
Before investing in bonds, you should examine the background and financial status of the issuer. It will guide you on whether you should invest in such a bond.
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Read the Prospectus Thoroughly
If you decide to invest in bonds, you should carefully review the prospectus. Understanding the types of bonds and analysing other factors, such as interest rates and ratings, will be useful.
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Take the Help of a Broker
If you need more ideas about the market for bonds, you can approach a brokerage firm that deals with the bond market. Investments can be made through a brokerage account. The broker will also take care of any fees or commissions.
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Focus on Long Term Investment
Long-term investment in bonds involves less risk. Instead of focusing on the market, you should focus more on long-term objectives.
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Think About Your Risk Tolerant Capacity
Bonds with lower ratings provide more interest to compensate for the higher risk. Therefore, you should decide whether you are ready to tolerate higher risk only to get a higher interest rate.
Benefits of Investing in Bonds
Investing in bonds has many benefits if you choose the right ones. Some of these benefits are:
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A Good Option to Generate Income
You can generate a reliable source of income by investing in bonds.
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Low Risk
Bonds carry less risk than stocks. You can also invest in bonds with higher ratings to lower risk.
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Protect Your Investment
An investment in a bond is a way to create an asset that protects your investment. This investment is an excellent option to fill losses in a short period of time.
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Help to Create a Portfolio
Investing in bonds offers potential for portfolio diversification and return. Bonds tend to increase in value during stock market downturns, creating an inverse relationship between stocks and bonds..
Primary Ways to Invest in Bonds
There are two main ways to invest in bonds. These are Individual Bonds and Bond Funds
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Individual Bonds
By purchasing individual bonds, you will know the exact amount you will hold, as well as the risk and return associated with that amount.
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Bond Funds
The second option for investing in bonds is to purchase bond funds. You can buy bond funds in mutual funds or exchange-traded funds (ETFs). Various types of mutual funds and ETFs carry different weights in their risk factors.
Also Read: Difference Between Cost Accounting and Financial Accounting
How Do Bonds Work?
Investing in bonds means giving a loan to a corporate entity or a government organization. When you invest in bonds, you pay the amount for a fixed period. The bond issuer will have to pay you interest during that period. After the maturity date, you will get back the amount you invested. The interest you receive during the bond period can therefore serve as a passive income source.
Conclusion
Bond investments are a reliable source of passive income. Bonds are essential for diversifying portfolios, which benefits most investors. Since investment in bonds carries less risk than stock investment, there is less chance of losing your hard-earned money. However, you should examine the ratings of bonds and the background of the issuer so that you can invest in suitable bonds. It would help if you always tried to invest in bonds with an AAA rating, as these are the safest bonds.
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