What are Bonds?

Bonds are debt instruments issued by entities such as governments, corporations, and financial institutions to raise capital. When you invest in bonds, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity.

Types of Bonds in India

• Government Bonds: Issued by the Government of India, these bonds are considered one of the safest investment options. Examples include Treasury Bills (T-Bills), Government Securities (G-Secs), and Sovereign Gold Bonds (SGBs).

• Corporate Bonds: Issued by companies to raise funds for various purposes. These bonds typically offer higher interest rates compared to government bonds but come with higher risk.

• Tax-Free Bonds: Issued by government-backed entities, the interest earned on these bonds is exempt from income tax. Examples include bonds issued by the National Highways Authority of India (NHAI) and Indian Railways Finance Corporation (IRFC).

• Municipal Bonds: Issued by municipal corporations to fund infrastructure projects. These bonds are relatively new in India but offer an alternative investment option.

• Inflation-Linked Bonds: These bonds provide returns that are adjusted for inflation, protecting investors from the eroding effects of inflation.

• Convertible Bonds: These bonds can be converted into a predetermined number of shares of the issuing company, offering potential for capital appreciation.

Benefits of Investing in Bonds

• Capital Preservation: Bonds are generally considered safer than equities, making them suitable for risk-averse investors.

• Steady Income: Bonds provide regular interest payments, offering a predictable source of income.

• Diversification: Including bonds in your investment portfolio helps diversify risk and balance overall returns.

• Tax Benefits: Certain bonds, such as tax-free bonds, offer tax advantages, making them attractive to investors in higher tax brackets.

• Liquidity: Many bonds are traded on stock exchanges, providing liquidity and the ability to buy or sell bonds as needed.