Differences Between Bonds and Debentures in India

Bonds and debentures are debt instruments used to generate capital, but they do have their share of differences. Not every bond is a debenture, but all debentures can be bonds. Although these two financial debt instruments are issued to raise capital or public funding, they function differently. Going forward, we’ll understand their differences in detail. 

What is a Bond? 

A bond is a debt instrument offered by private companies, government agencies, and financial corporations to bring additional money into the business from the people. This fundraising document acts as an IOU between bond lenders and borrowers. They are one form of secured loan taken from the public in return for a specified interest rate and repayment of the loan amount upon maturity date. 

A bond is an exceptionally good option for retail investors today for a secure investment. It is known to provide you with the advantage of a higher rate of interest, fixed returns, and periodic and stable income with the promise of a capital refund upon maturity. You can buy bonds online using secure platforms, namely BondsIndia and others in India. 

Which are the types of Bonds available for investment? 

There are several types of Bonds available in the Indian Market which are: – 

• Corporate Bonds 
• Government Bonds 
• Tax- Saving Bonds 
• Municipal Bonds 
• Convertible Bonds 
• Perpetual Bonds 

What are Debentures? 

Debentures are also debt instruments like bonds, but private companies issue them for a particular purpose. The company requires this fundraising instrument to raise funds. It can be anything like expanding the entity, starting a new project, etc. Both governments and corporations frequently issue debentures to raise funds for varied business and other needs. Debentures do not have collateral, so investors are advised to check the creditworthiness of the debenture issuers before going ahead with the investments. Governments generally issue it for more than 10 years term. You can explore buying debentures online without much effort. 

Which are the types Of Debentures available in the Market? 

There are several types of Debentures available in the Indian market, which are: – 

• Convertible Debentures 
• Non- Convertible Debentures 
• Secured Debenture 
• Unsecured Debenture 
• Redeemable Debenture 
• Irredeemable Debentures 

Bonds Vs Debentures

So far, you have read and understood the basic concepts of bonds and debentures. Now, we will tell you about the subtle differences between the two. 

Info	Bonds	Debentures
Meaning	A bond is a debt instrument issued by private and public organizations to collect funds from people with the commitment to pay periodic interests and repay the loan on the date of bond maturity.	A debenture is a debt instrument private corporations’ issue to raise funds for a specific purpose. In return, the debenture holders are given the first preference to receive interest over stockholders. The purpose of debentures is to raise finances for the short-term or long-term.
Issuing Entity	Private entities, financial companies and government agencies issue bonds.	Private entities issue debentures to meet specific needs in the business.
Risk	Bonds are one of the secured investment options. They are less risky compared to other avenues.	Unlike bonds, debentures are high-risk instruments because they are not attached to security.
Interest rate	Bonds carry an Interest rate, also called a coupon, to be paid at regular intervals till the time of Maturity.	Debentures are like bonds, carrying an Interest rate, also called a coupon, to be paid on regular intervals till the time of Maturity or at the time of maturity of NCD.
Collateral	Bondholders receive interest monthly or annually. They are not affected by market volatility either.	The debenture holder receives periodic interest.
Payment	Bondholders receive interest monthly or annually. They are not affected by market volatility either.	The debenture holder receives periodic interest.
Holders	Investors who have the bonds are called as bondholders	Investors who have debentures are called as debenture holders
Convertibility	Bonds cannot be converted into equity or other instruments.	According to the issuer’s offering, the debenture holder can convert the debt instrument into a prefixed number of shares after a set time mentioned in the document.
Priority	Bondholders are given the top priority at the time of liquidation or unforeseen situations in the company.	A debenture holder is the first one to be paid before equity shareholders.
Tenure	Bonds are issued for a longer tenor but depend upon the issuer to decide the period, which can vary from 1-15 years.	Investment in debentures is done for a specific purpose. So, their tenure can be short-term or long-term, depending on the task pursued by the company. By and large, the time frame is shorter than bonds.

How to invest in Bonds and Debentures? 

Investing in bonds and debentures can be a good option for those looking for fixed income and stable returns. Here are some steps to invest in bonds and debentures: 

1. Research: Research the different types of bonds and debentures available in the market and their performance history. This will make you find the best investment options. 

2. Assess Your Risk Profile: Consider your risk tolerance, investment horizon, and financial goals before investing in bonds and debentures. This will help you choose the right investment option that meets your financial goals. 

3. Select a Broker or a Trading Platform: Choose a broker or a trading platform that offers bonds and debentures. Ensure the broker or platform is authorized and registered with the relevant regulatory authorities. 

4. Open a Trading Account: To invest in bonds and debentures, you must open a trading account with your broker or trading platform. This account will be used to buy and sell bonds and debentures. 

5. Place Your Order: Once you have identified the bonds and debentures you wish to invest in, place an order with your broker or trading platform. You can buy or sell bonds and debentures based on prevailing market conditions. 

6. Monitor Your Investment: Keep track of your investments and monitor their performance regularly. This will help you make informed investment decisions and adjust your portfolio as required. 

Who Should Invest in Bonds & Debentures? 

Investors who cannot bear risk should consider investing in bonds. Bonds carry less amount of risk and are considered to be safer investments than debentures. 

And bonds are excellent as long-term investment options as they give the investor fixed interest payment and the principal at maturity. Also, they are backed by collateral. 

However, debentures offer higher returns and are a great short-term investment option. After evaluating the good and bad sides, it’s up to the investor whether they want to invest in Bonds or Debentures.  

Conclusion 

There are many differences between bonds and debentures. However, both are important when anyone is thinking about making an investment either short- or long-term. Investors who prefer to make low-risk investments should invest their money in financial instruments like bonds and debentures. 

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