Bonds are debt instruments that bond issuers, such as companies and governments, use to borrow money. If you buy a bond, it means that you are a creditor to that issuer. The latter now has to pay you interest during the bond’s term and return the principal at the end of the term. Bonds are often used to raise large-scale funds for expansion or infrastructure projects.
Bond basics
Bonds are fixed-income securities, i.e., the returns are periodic interest payments plus the principal paid at the end of the bond term (maturity). Issuers set an initial price for the bond, called the par or the issue price. The bond issuer sets the value of the bond at maturity upfront, which is called the face value. The interest payable is calculated on this face value.
The rate of interest to be paid is called the coupon rate and the date on which the interest is paid is the coupon date. Companies and governments are the usual bond issuers. Corporate bonds and government bonds are usually publicly traded, which makes it easy for retail investors to buy. On the market, bonds perform as per certain indicators, making them go below or above the issue price.
Buying bonds
You can buy bonds from either the primary market (subscribing to public issues) or the secondary market, from exchanges like the National Stock Exchange (NSE). The NSE has its NSE goBID app for buying government bonds online on which you can register easily. You need to have a working demat account that can be linked to the app.
What to look for when buying bonds
Here are some key factors on how to pick bonds:
- Issuer’s credit quality/rating: If the issuer has a good credit rating, its bond should do well. A sub-standard credit rating means there is a greater risk of the issuer defaulting, which means the issuer will have to pay more in interest to get investors to buy the bond.
- Bond maturity term: Short-term bonds pay less interest since they are less exposed to inflation or interest rate fluctuations. Long-term bonds tend to pay more interest to make themselves attractive to investors.
- Bond yield: You should also look at the bond yield, which is the returns percentage for you, the bond holder or investor.
Bond types
There are many types of bonds to choose from:
- Government bonds: Government of India (GoI)-issued bonds, to finance large-value projects; low-yield, low-risk instruments.
- Treasury bills: Short-term (less than one-year) government bonds that don’t pay interest but have the potential for capital gains.
- Municipal bonds: Since 1997, municipal bodies can issue bonds for various projects.
- Sovereign gold bond: Government-issued fixed-interest rate bonds denominated in gold grams instead of currency (minimum investment 1gm, maximum 4kg per investor in one financial year).
- Corporate bonds: Bonds issued by companies for various purposes such as expansion, acquisitions, etc.
Conclusion
Bonds are a safe bet if you are a conservative investor. However, make sure to research the issuer, their credit rating, and the performance before investing in bonds. You can also consult a financial advisor who can guide you on the kind of securities to invest in depending on your goals and risk appetite.
