Bonds are fixed income securities that are bought and sold in the capital market. It is a financial instrument through which the government or private companies borrow from the purchaser of the bond.
Issuing bonds helps the entity raise capital for business development at cheaper rates vis-a-vis banks and lending institutions. The bond issuer is obliged to make the repurchase, within the stipulated time period by paying the investor the agreed interest. The government also issues bonds to pool money from investors to finance government projects.
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There are several ways you can buy bonds in India. Listed below are some of the ways bonds are purchased by investors:
Buy From a Broker: You can buy bonds through a broker. On the brokerage platform, you can buy and sell bonds by paying a brokerage fee. You can purchase the bonds from an investor looking to sell. You may receive a discount on the face value of the bond. Bond is sold at discount and redeemed at par.
Through an ETF: Bond ETF is a low-risk investment avenue, suitable for investors who are seeking fixed returns at low risk. Bonds can be purchased via ETFs or exchange traded funds which is a type of mutual fund. Here, the ETFs purchase bonds from several companies and have short, medium and long term tenure from which you can choose your option as per your requirement. It is a great option as it provides diversification of your assets and is highly liquid.
Directly from the Government: Government bonds are one of the safest investment options. It helps investors invest in debt securities as they carry a sovereign guarantee. The government bonds are issued by the government authorities through RBI. It helps the government raise money for various developmental projects and infrastructure. The only problem is government bonds are issued for higher denominations, but they offer high credit rating and a sovereign guarantee.
See Also: Bond Market in India
A bond is an interest-bearing debt certificate. The debt market in India comprises of both government bonds and private bonds. The debt market consists of bonds issued by the government like municipal bonds, government bonds or bonds issued by private company like corporate bonds. The government bonds are one of the safest investment options.
Once the prices of the bonds are set, they are traded in the debt market. Once the bonds are traded in the debt market the prevailing interest rates dictate the price of the bonds. The prices of the bonds are determined by market rates. When the demand for bonds goes up, the interest rate rises and bond prices fall and vice versa. However, predicting such trends is not easy. Many investors try to predict if the bonds rates would go high or low. But, waiting to buy bonds by timing the bond market is a big no-no if you are a first-time investor.
See Also: Bond Yield In India
The bond market consists of both government bonds and private bonds. Bonds are rated by credit rating agencies like CRISIL. Through these rating, you can understand the creditworthiness of the companies that issue bonds. AAA rated bonds are very safe.
Government Bonds: The government bonds are mainly issued through RBI through the non-competitive bidding facility. Government bonds are a safer investment option as they carry the guarantee of the government. These bonds are mainly issued to pool money from investors to pay for the infrastructure and developmental projects. The bonds are issued at a discount and the investor is able to receive a profit when the bond is redeemed at par.
Municipal Bonds: Bonds are also issued by state and local government bodies. The municipal bodies and the municipal corporates issue such bonds to raise money for financing projects. Municipal bonds were introduced in India in 1997. Bangalore Municipal Corporation was the first to issue Municipal Bonds in India in 1997. Ahmedabad made a notable issue of bonds in the following years. These bonds come with high credit ratings and are good investment options for investors.
See Also: Understanding Bonds and Their Risks
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