Find Your First Bond

A bond is a fixed-income security that’s used by governments or companies to raise capital. When you invest in a bond, you essentially lend money to the issuer who in turn pays you back the principal along with the interest amount at a set date.

Bonds are a less risky asset than equity which can potentially offer comparable returns over time. Bonds can help you diversify your portfolio and balance out the risk exposure through stocks and other assets.

Yes, bonds are generally less risky than stocks because they offer a steady, predictable income at a pre-defined date. However, some bonds have risks.
Stocks on the other hand are volatile and the value can fluctuate based on the company’s performance and the market conditions.

There are several types of bonds, each of which have unique characteristics and goals to serve. Here are some of the common ones.

• Corporate bonds

These are issued by companies to raise capital and offer returns that are higher than government bonds.

• High-yield bonds

Also known as junk bonds, these bonds are issued by companies with lower credit ratings. The interest rates are usually on the higher side to compensate for the lower credit ratings.

• Government bonds

These are issued by the government and are considered highly safe.

• Municipal bonds

Issued by local governments or municipalities to fund public projects, these bonds offer tax-free interest income.

• Zero-coupon bonds

These bonds do not pay periodic interests, and are issued at a significant discount to their face value and mature at their full face value. They are more sensitive to changes in interest rates compared to regular bonds.

Bond yield is the return you as an investor get from a bond, usually shown as a percentage of the bond’s face value. It represents the interest income generated by the bond with respect to its current market price or face value.
There are different types of bond yields such as coupon yield, current yield and yield to maturity.

It starts with determining the investment goal, tenure and risk tolerance, followed by exploring the bond type that suits the goal best. Once you have decided the bond type, assess the credit rating of the bond issuer, evaluate the interest rates, understand the maturity period and payout frequencies. Last but not the least, don’t forget to consider the tax implications.

A bond credit rating is an assessment of the creditworthiness of a bond which indicates the likelihood of the issuer’s ability to meet its debt obligations. These ratings are assigned by credit rating agencies like CRISIL, CARE and ICRA, and are expressed in a scale of AAA to D, wherein AAA indicates the highest credit quality while D implies default.

Bond prices are inversely proportional to interest rates. When interest rates go up, bond prices fall because newer bonds offer higher rates, making older bonds less attractive.

Bond Maturity is the date when the issuer pays back your principal amount along with any remaining interest payments. Based on their maturity dates, bonds can be classified as the following:

• Short-term (1-3 years)
• Medium-term (3-10 years)
• Long-term (10+ years)

You can lose money in bonds under the following circumstances:

• Selling a bond before it matures in a rising rate environment
• Issuer defaulting on their payments
• Inflation reducing the value of your fixed payments
• Callable bonds being called early before it matures

The taxation of the bond depends on the type of bond and the income it generates.

Interest income

• Government bonds - Interest earned on these bonds are fully taxable as per your tax slab
• Corporate bonds - Interest earned on Corporate bonds are fully taxable as per your tax slab
• Tax-free bonds - Interest earned on these bonds are exempt from tax

Capital Gains

• Short-term Capital Gains - If you sell a bond before three years, any profit is considered a short-term capital gain and is taxed at your regular income tax rate.
• Long-term Capital Gains - If you sell a bond after holding it for more than three years, the profit is considered a long-term capital gain and is taxed at 20% with indexation benefits.

Accretion of Discounts

• If you buy a bond at discount below its face value, the difference can be recognized as income over time or at maturity. This is called accretion.

The first step to buying bonds in India is to open a Demat account, where bonds are held electronically. You can open a Demat account through any registered depository participant like a bank or a brokerage firm. You can buy bonds through brokers, banks or online platforms like Jiraaf, Zerodha etc. For new issues, you can participate in the primary market through platforms like the RBI Retail Direct Scheme. While for existing bonds you can buy them from the secondary market through a broker or online trading platform.
Once you’ve selected the bonds of your choice, you can place your order through your broker or online platform. The bonds will be credited to your account upon purchase.

A debt mutual fund pools in money from multiple investors to invest in a portfolio of debt securities including bonds, T bills and other money market instruments. Returns from debt mutual funds can vary based on the performance of the underlying assets. Debt mutual funds are highly liquid and are safer than equity funds.

Bonds are debt instruments issued by companies or governments to raise capital. They promise to pay back the principal amount on a specific date and provide interest payments in regular intervals. The returns are predetermined and predictable. Bonds can be traded in the secondary market but they are not as liquid as mutual funds. Bonds are lower risk compared to debt mutual funds, however, they are subject to interest risk and credit risk.

Inflation reduces the purchasing power of the fixed interest payments and principal that bonds provide. That apart, RBI often raises interest rates to combat high inflation. When interest rates rise, the prices of existing bonds fall because new bonds are issued with higher yields, making the older bonds less attractive. Sometimes, investors’ expectations of future inflation can also influence bond prices. Expectations of higher inflation will demand higher yields to compensate for the anticipated loss in purchasing power.
Inflation-linked bonds are an aberration from the norm. They are designed to protect investors from inflation. The principal value of these bonds increases with inflation, ensuring that the actual value of the investment is maintained.

Bonds are a good investment to attain a well-balanced portfolio for all times, as they are stable, predictable and offer inflation-beating returns that are comparable to equities. The allocation may vary (20% to 80%) by investor risk appetite, age of the customer, and investment goals, however, a portfolio without bonds is not ready for capital growth or preservation.
The current market volatility is a reminder of how bonds offer a stable investment option and act as a safe haven when equities falter. What makes the Indian bond market even more apt for investment at the moment is the policy reforms in favor of retail investors, inclusion of Indian bonds in foreign indices and steady demand from institutional investors.