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5 basic types of bonds, explained

Dec 06, 2019 | 2 months ago | Read Time: 3 minutes | By iKnowledge Team
5 basic types of bonds

According to a Morgan Stanley 2018 report, the Indian USD/G3 bond market will reach US$ 160 billion in 2018. When you look at investment plans, you might have to deal with the dilemma of where to invest for maximum returns. Bonds are popular investment options because they can be used as collaterals when you apply for a loan. For beginners, bonds are debt securities used to raise funds from investors in return for a repayment with interest later. The term ‘interest’ is also referred to as ‘coupon’ in the Bonds market. As per the contract terms, interest on bonds is payable to investors monthly, semi-annually or annually.

In India, the debt markets are mainly divided into G-Sec or Government Securities and Corporate bond markets. The G-Sec market consists of bonds by the central government and state government. Corporate bonds include corporate debentures along with non-government securities bonds offered by financial institutions and Public Sector Units (PSUs). A 54EC Bond is an example of Capital gains bond that qualifies for tax exemption under Section 54EC of the Indian Income Tax Act, 1961.   

5 basic types of bonds available for investments in India are given below:

  • Government bonds

As per National Stock Exchange (NSE), the different types of government bonds consist of Fixed Rate Bonds, Capital Indexed Bonds, Floating Rate Bonds, Bonds with Call/Put Options and Zero-Coupon Bonds. Fixed Rate Bonds come with a fixed rate for the entire existence of the bond. Government bonds are safe if you have a long-term investment plan because the contract maturity duration is usually 10 years, 15 years or 20 years. Taxable Government Savings Bonds offer an interest rate of 7.75% per annum.

  • Corporate bonds or NCDs

As per the ASIFMA report, in the FY 2016-17, corporate bonds issued in the country through private placement reached 7,035 billion rupees. Corporate bonds or Non-Convertible Debentures are used by businesses to raise money from the capital markets. Investing in corporate bonds does not give you ownership of the shares in the company and you do not face the risk of uncertainty of share markets. Corporate bonds are more like a loan for a specific duration and can be secured or unsecured in nature. Secured corporate bonds come with high security but the returns can be lower. Unsecured bonds can provide greater returns but carry less security. Corporate bonds are taxable investment opportunities but offer a higher return on investment.

  • Tax-free bonds by PSUs

These are tax-free bonds exempt from taxes offered by Public Service Units or PSUs such as Indian Railways, National Highways Authority of India (NHAI) and National Housing Bank (NHB) for investors at competitive coupon rates. In 2018, NHAI bonds with a coupon rate of 8.2 percent became one of the popular bonds attracting investors.

  • IINSS-C bonds

The Inflation Indexed National Savings Securities Cumulative (IINSS-C) Bond, introduced by the Reserve Bank of India (RBI), is a type of bond specifically to beat the inflation risk. Your savings are safeguarded from inflation while you earn interest from the bonds. Bonds are issued in the form of Bonds Ledger Account (BLA) and a certificate of holding is issued in the name of the investor.

  • Gold Sovereign bonds

Introduced by the government in 2015, under the Government Securities Act 2005, these bonds allow you to purchase gold in the dematerialized form. The investor benefits from the appreciation of the gold rate and receives annual pay-outs at a fixed low-interest rate of 2.5% per annum. Also, you may lose money if the market price of the gold drops as per the contract duration and terms.

Bonds are a safe investment but if you wish to tap multiple investment opportunities with a balanced risk then you can put your money in ULIP (Unit Linked Insurance Plan). Eventually, whether you choose bonds or combined investment plans depends on your investment goals. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

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