In India, there are various types of bonds like Government Bonds, Corporate Bonds, Convertible Bonds, Zero-Coupon Bonds, Inflation-Linked Bonds & Callable Bonds. This guide provides a comprehensive overview of all these bond types, their suitability for investment, and their role in the financial market.
Exploring The Bond Market in India
The bond market in India plays a vital role in facilitating the trading and exchange of various debt securities. It is an integral platform for entities like the government and corporations to raise funds. Simultaneously, the bond market allows investors to participate in debt instruments and generate income from fixed-interest payments. Bonds are considered to be a safe long-term investment option.
Types of the Bond Markets in India
In India, the bond market can be broadly categorised into two types: the primary market and the secondary market.
The primary market is where new debt securities are initially issued and sold directly to investors. Investment banks play a crucial role in facilitating the issue of bonds in the primary market. This market segment is where investors can participate in initial bond offerings and purchase newly issued debt instruments.
The secondary market focuses on the trading of existing bonds. Investors can buy and sell bonds in the secondary market through intermediaries such as brokers. Bond prices in the secondary market fluctuate based on factors like economic conditions, supply and demand dynamics, and prevailing interest rates. It provides liquidity and allows investors to adjust their bond holdings based on their investment objectives.
Types of Bonds in India
You can access numerous types of bonds in the financial market, each catering to different investment needs and preferences.
Let’s explore some of the common bond types which will help you with meaningful portfolio diversification.
The central or state governments solely issue government bonds to raise funds for various purposes, such as infrastructure development. These bonds are considered relatively safe investments as the government backs them.
Examples of government bonds in India include sovereign gold bonds, inflation-indexed bonds, and GOI savings bonds.
Private or public corporations issue corporate bonds to raise capital for business operations, expansions, or acquisitions. Investors who purchase corporate bonds essentially lend money to the issuing corporation and receive fixed interest payments over a specific period.
Corporate bonds offer potentially higher returns compared to government bonds but also carry higher risks.
Convertible bonds are meant to give investors the option to convert their bonds into a specified quantity of equity shares of the issuing company. This feature provides investors with the potential to participate in the company’s growth and benefit from stock price appreciation. Convertible bonds offer a unique combination of fixed income and equity exposure.
Zero coupon bonds, also known as discount bonds, do not pay regular interest. Rather, they are issued at a discount to their face value and redeemed at their full face value upon maturity. The mere difference between the purchase price and the face value represents the investor’s return. Zero coupon bonds are often favoured by investors looking for capital appreciation rather than periodic interest income.
Inflation-linked bonds, as the name suggests, provide returns that are linked to inflation rates. The Reserve Bank of India (RBI) issues these bonds, and the interest payments adjust based on changes in the wholesale price index. Investing in inflation-linked bonds can act as a hedge against rising inflation and help preserve purchasing power.
Callable bonds are defined as the category that gives the issuer the right to redeem the bonds before their maturity date. This feature offers the advantage of lower interest rates in the market. However, from an investor’s perspective, callable bonds do carry the risk of early redemption and, at times, may result in reinvestment challenges and lower overall returns.
How Can You Invest In Bonds?
If you’re interested in investing in bonds, having a reliable and user-friendly trading platform is essential. The Shoonya app is a leading online trading platform in India that offers a seamless investment experience. With Shoonya, you can trade in bonds at zero commission with access to a wide range of bond options and easily trade.
Understanding the various types of bonds in India is highly important for investors who are looking to diversify their portfolios with bonds and aiming to achieve their financial goals. Now, whether you prefer government bonds’ safety, corporate bonds’ potential returns, or convertible bonds’ unique features, there are multiple options available in the stock market to suit your investment needs.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.
The most popular types of bonds include government bonds, corporate bonds, municipal bonds, and treasury bonds.
Some of the bonds that are usually considered safe include Government bonds, especially treasury bonds.
Government Bonds are safe with low-interest rates, Corporate Bonds offer higher returns but higher risks, Zero-Coupon Bonds have no interest, Perpetual Bonds have no fixed maturity, and Convertible Bonds can turn into equity shares.
Infrastructure Bonds fund projects and may offer tax benefits, Tax-Free Bonds provide tax-exempt interest income, Credit-Rated Bonds indicate creditworthiness, Foreign Currency Bonds carry exchange rate risk, Inflation-Linked Bonds adjust with inflation, Innovative Perpetual Debt Instruments combine equity and debt features, and Green Bonds support eco-friendly projects.
Bonds in India vary by issuer (government, PSUs, corporates), tenure (short to long-term), coupon (fixed, floating, zero, cumulative), and security (asset-backed or credit-based).