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How to Invest in Bonds in India?

“I cannot cook” is a lazy statement made by people who don’t want to cook or build on that responsibility. Truth be told, it really does not take superior skills to cook a simple meal and continue with our day. It is a life skill available at our disposal at all times, yet we never seem to learn it but only admire the ones that do.
Cooking does not have to be ground-breaking. It mustn’t cause another Vlog. It does not have to contain a complex mix of spices cooked over a wood fire for you to get smitten by the lingering aroma of food served on the platter. We complicate it. Cooking is a simple pleasure. It is derived from the resources available at hand. And thanks to the overwhelming resources on the internet, even the most complex-looking dishes seem simple when someone takes the trouble to break them down step by step until the supplies mature and are finally ready to be consumed.
The same policy applies to investment. Make a simple start. Once you start getting into it, you start figuring out the beats of investing, how it works, and how long you have to leave it for maximum palatability.
Being able to take good care of your savings is nothing short of cool, and once you learn how to do it, you’d be glad you made a start. Also, there will always be that one meal you can fall back to when the most interesting ones you skilfully set yourself up for, don’t meet the criterion. In the world of investment, that meal is known as bonds.

7 Types of Bonds for Investment

  • CORPORATE BONDS

Corporate bonds are issued by companies to raise financing for an array of reasons such as company operations, mergers, and acquisitions, or business expansion.

Important: Every corporate entity is assured of a credit rating by independent credit agencies like ICRA, CARE, and CRISIL. The safest rating is AAA and anything in the neighborhood of C is considered a high-risk investment.

  • TAX-FREE BONDS
Tax-free bonds are a product of debt investments. These bonds are issued by governments or government-approved agencies for the purpose of development projects. The interests you earn on these bonds are non-taxable.
  • Zero-Coupon Bonds
Zero-coupon bonds are a type of debt instrument. They are sold at a discount on their face value. The investor does not receive any coupon benefits on the bond, only the face value on maturity i.e. capital appreciation
  • Market-linked Debentures
Market-linked Debentures (MLD), unlike a common bond, do not pay a fixed coupon rate. The coupon rate is linked to the market return and thus serves as a good method to navigate the market. It brings stability to a portfolio in volatile markets. They are sophisticated debt instruments generally with higher minimum investment value
  • Public sector undertaking (PSU) BONDS

Public sector undertaking – PSU bonds are issued by companies owned by the Central or State Government. They are a safe form of investment for investors who are looking to invest in Government-backed entities.

  • PERPETUAL BONDS
They are fixed-income instruments that do not have a maturity date. Instead, the issuing company pays the investors a coupon or interest at a fixed date for perpetuity. Investors can use the secondary market in case they wish to exit in case of traded perpetual bonds.
  • MUNICIPAL BONDS

Municipal Bonds are debt instruments issued by states, and local governments to fund day-to-day requirements and finance infrastructure as well as capital projects such as building schools, highways, or railways.

How to Invest in Bonds?

Adding to the previous statement, bonds are secured investment instruments that offer safer returns and comfortable tenure. When you buy a bond, you are issued a certificate with an interest rate promised by the issuer for a fixed period, and then the loan that you lend to the entity pays you back on the date of maturity.
Once you invest in bonds, you are creating a secondary source of income for yourself and a well-balanced investment portfolio that will help you when the stock market gets volatile and other investments aren’t performing well. Bonds also help you diversify the portfolio and reduce risk.
Bonds are sold in the primary market as well as the secondary market. The primary bond market is where two parties deal with each other, the issuing company and the investor. A secondary bond market is where bonds that are issued and purchased in the primary market are traded among investors.

Earlier, investing in bonds was a long and tedious process. One had to go to a broker with their documents, choose from limited bond options, and sign a few papers, before getting the bonds issued to themselves in the form of certificates or a deposit in the DEMAT account. The whole operation would take up to a week or more in some cases. With the furtherance of technology, this process has become completely paperless, super-quick, and easy.

In the primary bond market, the investor will be needed to fill in a form and submit the application along with the required documents, and on the allotment, the bond is to be deposited in their DEMAT account. In the secondary bond market, bonds can be traded provided they are available for investors to do the trading.

While there are now platforms available for investors to search through the sea of bonds available with them, BondsIndia is also very well known that anyone can now invest in bonds in India from the comfort of their house, anytime using mobile apps or websites.

Can NRI invest in Bonds in India?

The Bond Market has become diverse and more forgiving this past year. The last time NRIs were able to invest in India was in 2013 and the option to invest was only through NRI bonds. Things changed in 2020. When foreign investors were on their way out due to Covid-19, GOI made amendments and allowed NRIs to invest in the Indian debt market without any upper limits. The RBI came up with a dedicated channel called Fully Accessible Route (FAR) that enables NRI investors to participate freely.

NRIs will now also be allowed to put their funds in bonds issued by NHAI and REC under section 54EC bonds.

All things considered, an NRI investor will still have to make investments through a separate window on the website. There are certain things to remember before buying bonds in India if you’re a Non-reliable Indian:

  • A Demat account that is linked with the investors’ NRE or NRO account
  • Except for the tax-free bonds, the interest earned on bonds purchased by NRIs is taxable.
  • The tenure and issues get updated time and again by the Government of India.

Minimum amount to invest in bonds in India

The minimum amount is also known as the face value of each bond. The minimum amount you can invest in bonds is Rs 1000. After that, the amount increases in multiples of 1000. However, the minimum number of bonds may vary from company to company.

Is it safe to invest in Bonds in India?

There are three thumb rules to investing: Returns, liquidity, and safety. Not particularly in that order. Investors should be mindful of where they are investing. Bonds are safer than other investment avenues. Government bonds are safer than Corporate Bonds as they are issued by the government or one of its distributors.

A sweet comparison of bonds with fixed deposits.

The market is in favor of bonds. Some Bonds are even offering more than fixed deposits. Deciding which credit rating to invest in is where investor discretion comes into play. Some bonds are high-risk due to the financial standing of the company and its payment history. While some bonds are low-risk with higher ratings but provide lesser but assured returns.

How to invest in Government bonds in India?

Government bonds are best when held till maturity. 2020 was the year the Government of India allowed retail investors to also invest in G-Secs. GOI introduced some interesting schemes to lure in retail investors. To make it more accessible to the common investor, NSE established a mobile application where investors can buy bonds.
The app also enables investors to make seamless payments on the platform using simple payment methods such as UPI.
There are more than one platforms to invest in government securities. However, what you need is a service that gives you unequivocal information about the bonds and their benefits along with their availability. BondsIndia is one of the contributors to that caliber and resides where information and quality are on the square.

How to Invest in Corporate Bonds in India

Investing in corporate bonds would mean you will need to do complete research on the company and its credit quality to ensure a safe return of your principal amount at maturity or in case the company goes bankrupt, it is capable to pay you back along with the interest. Corporate bonds offer a greater yield than G-Secs.
While purchasing a corporate bond, choose a company that has a better credit rating. A credit rating of AAA is considered to be the highest, while anything in the ambit of C is considered a high risk of default. Therefore, the issuer does not have a healthy credit score, and investing in a credit ranking like that is only recommended if you are willing to take the risk.
Bonds can be purchased directly through the issuer in the primary bond market. You will need to fill up an application form and complete your KYC if it’s not completed already and pay the amount and the bond will be deposited in the Demat account. Bonds can be purchased on BondsIndia’s platform.
Note: In case the bond that you are looking for is not available, you can write to us, and we will try to obtain it for you. Typically, the response should not take longer than 24 hours.

How to Invest in Tax-Free Bonds in India

Tax-Free bonds are issued by distributors that are authorized by the Government. The authorized entities could be one of these:
  • NHAI (National Highway Authority of India)
  • IRFC (Indian Railway Finance Corporation)
  • PFC (Power Finance Corporation)
  • REC (Rural Electrification Corporation)

Since Tax-Free Bonds are issued and managed by government-owned companies, the chances of default are second to none. However, the bonds that are offered by the state governments are ranked as per the credit guidelines. Do check their credit rankings while making a decision.

You are basically lending money to the government to continue doing the work and completing the projects. The government in return pays you a fixed interest as promised then at maturity, the money you invested comes back. Tax is not deducted from the interest you earn on these bonds.

Tax-Free bonds are safe, pay annually, and are long-term. In case the interest rates go down in the future, the bond price will increase.