A bond is a fixed-income investment that represents a loan made by an investor to a borrower — typically a corporate or government entity. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Bondholders receive interest payments (known as coupons) over a set period and are repaid the principal (face value) at maturity.
Types of Bonds
Government Bonds:
Issued by central or state governments, these bonds are considered low-risk investments with guaranteed returns. Examples include Treasury Bills, Sovereign Gold Bonds, and Government Securities (G-Secs).
Corporate Bonds:
Issued by companies to raise capital. These typically offer higher interest rates than government bonds but come with higher risk depending on the issuer’s credit rating.
Tax-Free Bonds:
Issued by government-backed institutions like NHAI, PFC, and REC, the interest earned on these bonds is exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act.
Convertible Bonds:
These bonds can be converted into a predetermined number of equity shares of the issuing company, offering a hybrid of fixed income and potential equity appreciation.
Zero-Coupon Bonds:
Issued at a discount to face value, these bonds do not pay periodic interest but repay the full face value at maturity, providing returns via capital appreciation.
Inflation-Indexed Bonds:
These bonds are designed to protect investors from inflation. The principal or interest (or both) is adjusted periodically based on inflation rates.
Benefits of Investing in Bonds
Stable and Predictable Returns:
Bonds provide regular interest income and are less volatile than equities, making them a good choice for conservative investors seeking predictable returns.
Capital Preservation:
Because bonds return the principal at maturity, they are a useful tool for preserving capital while earning modest income during the holding period.
Portfolio Diversification:
Including bonds in a portfolio helps reduce overall risk by balancing equity market volatility. They are negatively or less correlated with stocks.
Tax Advantages:
Some bonds, like tax-free bonds, offer tax-exempt interest income, making them particularly attractive for individuals in higher tax brackets.
Liquidity and Tradability:
Many bonds, especially government securities, are traded on exchanges or OTC markets, offering investors liquidity if they need to sell before maturity.
Credit Quality Transparency:
Bonds are rated by credit rating agencies, helping investors assess the credit risk before investing and make informed choices.
Flexible Investment Options:
Investors can choose from a variety of bonds—short-term, long-term, high-yield, or low-risk—based on their financial goals and risk appetite.
