Last time we understood what bonds are. Now let us see the different types of bonds available in India.
• Government Bonds: These bonds are the safest bonds as they do not carry any risk of default. These bonds are issued by RBI and have longer maturity period. These bonds have a fixed coupon rate and maturity period. The interest payments are made once in 6 months. Some common government bonds are NABARD bonds and 8% Taxable Bonds. But they do carry interest rate risk as they are highly liquid. They are also regarded as the benchmark as well as harbinger of the interest rate scenario.
• Corporate bonds: These bonds are issued by companies to finance their projects. They carry higher coupon rate, but are risky as the worth of the bond depends on the financial strength of the issuing company. Hence always choose those corporate bonds that have been highly rated by the credit rating agencies to ensure peace of mind and safety of your money.
• Zero coupon bonds: These bonds don’t have any coupon rate, hence the term zero coupon. Here the maturity value of the bond is higher than the face value. The difference between the two is your profit. E.g. if the face value of the bond is Rs 100 and its maturity value is Rs 150, then the difference of Rs 50 is your income.
Looking for a guaranteed and safe income with high returns? Then think about bonds. Bonds are nothing but loans taken by government and corporates from investors for particular project. It could be for a particular project like Rural Electrification Bonds issued by REC to finance its projects. You are primarily a lender, who buys bonds issued by these entities. In return, the issuer agrees to pay you interest on the amount you lend.
The bonds need to be held for a certain period. This is called as maturity period. The rate of interest is called as the coupon rate. Like shares, the bonds also have face value. E.g. a bond with a face value of Rs 100 and a coupon rate of 6% with a maturity period of 10 years, will have a holding period of 10 years and earns an interest of 6% per annum.
However there is a big difference between stocks and bonds. While the returns (dividends) from stocks are not guaranteed, the returns from bonds are assured. As the interest rate on the bond is fixed, you have an idea of how much you will earn during the tenure of the bond. Hence it is one of the fixed income instruments.
However the income from bond is taxed. So you need to be aware of the fact that you will end up paying tax, which will thus increase your tax liability. Hence it is essential to get proper financial advice before investing in bonds.