The financial markets have opened up a plethora of investing opportunities to the masses. While there are several types of investment options in India, bonds are undoubtedly the one of the most widely followed assets. With the regular investors now participating equally along with the other major market players, it is quite evident that the amount of risk is less in case of bonds and return is higher.
This article brings you a close study of the different types of bonds in use in India!
What are bonds?
Bonds or T-bills are G-secs are provided by the Government of India for the purpose of borrowing money from investors. While the big investors are entities like banks, insurance companies, mutual funds, trusts, and corporates, smaller investors will mean HNI’s, NRIs, HUF members, and individuals.
Investment in bonds can be done via primary or secondary market. In primary market, one can subscribe to the public issue of large companies. Alternatively, one can purchase bonds from secondary market being traded on exchanges. Usually, bonds are considered to be illiquid are kept till the maturity.
Different types of bonds that you can invest in India
In India, purchasing government bonds is easier than ever using a mobile app or a web-based app of NSE (National Stock Exchange). The NSE app for buying government bonds is “NSE goBID“. NSE makes available to the users both a mobile app as well as a web-based platform. When you buy government bonds via these apps, you are buying them in the primary market.
Here’s a close look into some of the bonds available in the Indian market:
1.Capital Gains Bonds
- 54EC bonds or capital gains bonds can be described as financial instruments which entail tax exemptions under Section 54EC to an investor.
- Tax deduction is available under section 54EC of the Income Tax Act. 54EC bonds do not allow any tax exemption on short-term capital gains tax. Invest in 54EC bonds to get benefits of tax deduction.
How to invest:
The maximum limit for investing in 54EC bonds is Rs. 50,00,000. The eligible bonds under Section 54EC are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited).
2.Government Securities
- Government securities or G-Sec are also referred to as government bonds. These bonds are debt instruments that are issued by the central and state governments.
- These investments work in much the same way as a corporate debt issue. Corporations issue bonds as a way to gain capital for buying equipment, funding expansion, and paying off other debt.
How to invest:
The Reserve Bank of India recently announced that retail investors can now invest directly in the government’s primary and secondary bond market by opening gilt accounts with the national banks and monetary policy regulator. This structural reform will deepen the bond market in India.
3.Inflation-Linked Bonds
- Inflation-linked bonds aim to provide security of capital and protection against inflation. It was introduced by the Reserve Bank with the motive to wean away investors from physical gold.
- Inflation component on principal will not be paid with interest but the same would be adjusted in the principal by multiplying principal with index ratio (IR). At the time of redemption, adjusted principal or the face, whichever is higher, would be paid.
- This happens even if the inflation rate is relatively low. If you have a portfolio that returns 9% and the inflation rate is 3%, then your real returns are about 6%.
How to invest:
Investors can invest through the authorized banks and Stock Holding Corporation of India (SHCIL). They will fill an application form and submit the same along with other documents and payment to the bank. On receipt of money, the bank will register the investor on the RBI’s web-based platform (E-Kuber) and on validation, generate the Certificate of Holding.
4.Convertible Bonds
- A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares.
- Investors receive interests periodically while having a finger on the vein of a stock price increase.
- Since investors enjoy the option of conversion, the interest they earn is lower than regular fixed-income securities.
How to invest:
Individual convertible bonds are purchased through a broker that has a bond desk that specializes in the convertible markets. The do-it-yourself investor has the best opportunity for convertible investing through closed end funds–CEFs. One should apply for and fund an online broker account if he doesn’t not have one.
5.Sovereign Gold Bond
- Sovereign gold bonds or SBGs are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
- The gold in this bond is sold on a per unit basis such that every unit derives its value from underlying one gram gold with 999 purities.
- Tenure of eight years, with an option to exit from the bond from the fifth year and sixth month onwards.
How to invest:
A customer can apply online through the website of the listed scheduled commercial banks. The issue price of the Gold Bonds will be ₹ 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.
6.RBI floating rate bonds
- A floating-rate note (FRN) is a debt instrument with a variable interest rate. The interest rate for an FRN is tied to a benchmark rate.
- As per the Reserve Bank of India (RBI) press release, the interest rate on these bonds will be reset every six months.
- The bonds shall be repayable on the expiration of seven years from the date of issue. Premature redemption shall be allowed for specified categories of senior citizens.
How to invest:
Individuals (including Joint Holdings) and Hindu Undivided Families (HUF) are eligible to invest in these bonds. NRIs cannot invest in these bonds. There will be no maximum limit for investment in the bonds. The minimum investment starts from Rs 1,000 and in multiples of Rs 1,000, thereof. Interest received from these bonds will be taxed as per the income tax slab applicable to your income.