What if you are given the choice of investing in fixed-interest securities with the liquidity to be traded on the stock market?
Yes, this is what bonds are all about. Bonds are securities issued by companies or the Government to raise funds from the public. So, when you invest in bonds, you are, in reality, loaning money to the issuer for its financial needs. And, for your investment, you are rewarded in the form of fixed interest.
The first thing that comes to mind when we talk about investing is investing in the stock markets. It is true that the stock markets are exciting and the news of people getting rich and getting rich overnight is rife.
For many, it doesn’t have the same appeal as a good investment option. The jargon itself sounds obscure to a normal person and is considered by many to be boring; that is true during the days of exciting bull markets.
Most investors have insufficient knowledge about bonds and generally keep juggling between investing in equities and cash (savings or fixed deposits). Accordingly, bonds often fail to stay on the radar.
Bonds hold a fixed rate of interest, called a coupon, on their face value. This interest is paid annually or semi-annually. When the bond matures, the face value is paid.
Interestingly, you can trade bonds on the capital markets even before they mature. So, if your bond is fetching a higher price at the stock market, you can sell it to make a gain on your investment.
You should also know that there are different types of bonds available for investing. Some of these are –
- Government bonds that are issued by the Government.
- Corporate bonds that are issued by companies.
- Capital Gains bonds that allow you to invest your capital gains so that you can earn exemption under Section 54EC of the Income Tax Act, 1961.
- Zero-coupon bonds that are issued at a discount and carry no interest rate.
- Convertible bonds that can be converted to equity after a specific period.
- Sovereign Gold Bonds that help you invest in gold and also get interest income on your investments.
- RBI bonds that are issued by the RBI.
Bonds can provide diversification to your portfolio. When investing in bonds, however, do check out their coupon rate, rating, and Yield to Maturity (YTM) and then pick the best bond.
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