Bond Fundamentals
Understand the basics of investing in bonds.
What are bonds?
Bonds are fixed-income instruments that allow debtors (large companies or Governments) to raise money from investors to finance new projects or rework their current debts. In return, investors earn periodic Principal and interest payments over a defined tenure.
Types of Bonds/Securities
Corporate Bonds
Debt securities issued to investors by public or private corporations, to raise money in exchange for periodic interest and principal payments.
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Treasury Bills (T-Bills)
Short-term money market instruments issued by the Government of India to investors with a promise of repayment.
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Sovereign Gold Bonds (SGBs)
SGB are government securities issued by RBI which can be purchased by investors, starting with a minimum investment of one gram of gold. Investors earn 2.5% interest per year, in addition to returns from appreciation of gold at the time of maturity.
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G-Sec/SDL
Government securities and state development loans issued by central and state governments respectively. These tradable debt instruments offer investors risk-free, dated securities with a guaranteed return of both interest and principal.
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Why Invest in Bonds?
Create Additional Income
Investing in bonds helps you supplement your income with periodic interest and principal repayments on your investment. It ensures a predictable fixed income stream.
Reduce Risk with a Diversified Portfolio
Fixed income securities like bonds, help build a diversified portfolio. They are typically not market-linked and hence are not volatile like stocks.
Beat the Market Volatility
In the event of any turbulence or volatility in the stock markets, your bond investments can act as a counterbalance in your portfolio since their returns are fixed and their performance is not market-driven.
Earn Higher Returns
Fixed income securities like bonds can offer higher returns than traditional debt instruments.
Enjoy Tax Benefits
Bonds are often viewed as one of the best investment options for tax optimization with some bonds offering taxation rates with indexation benefits.
How to choose the right bond?
Keep these factors in mind to help you pick the right bond
Verify The Bond’s Risk Rating
All listed bonds are rated by SEBI regulated external credit rating agencies like CRISIL, ICRA, ACUTE, etc. This risk rating helps you assess the levels of risk involved in investing in these bonds.
Check The Minimum Investment Amount and Maturity Date
Check the minimum investment amount, periodic repayment schedule and maturity date of the bond, so that it aligns with your investment goals.
Understand better by consulting with an expert
After reviewing all the details of the bond, it is recommended to consult with your relationship manager to validate your understanding and get any open questions answered.
Essential Terms You Must Know Before Investing in Bonds
Minimum Investment Amount
The minimum amount can range from Rs. 1,000 to Rs. 100,000, without a specific maximum investment limit, which can depend on the bond provider and the type of bond you purchase.
Repayment Schedule
Repayment schedule is a pre-defined schedule of interest and principal payments to investors, that help you understand the cashflows you will receive on your investments.
Maturity Date
Maturity date helps you understand the total tenure of your investment. It is the scheduled date for last repayment on your investment. It represents the end of term of a bond, and all repayments are completed on or before this date.
IRR
Internal rate of return is an excel function to calculate the annual rate of growth that an investment is expected to generate. It takes into consideration the time value of money.
Coupon Rate
The coupon rate is the interest rate that bond issuers pay on the face value of the bond. It is used to calculate how much investors get as interest income from bond issuers.
Credit Rating of the issuer
A credit rating is basically a grade that determines the risk and creditworthiness of a specific bond where
AAA
is the highest-rated bond and
D
is the least-rated bond.
Have more questions?
Check out our FAQs on bonds
All investment opportunities on Jiraaf platform carry risk and investors should carefully evaluate whether the opportunity is suitable for them before making the investments. Please read detailed risk factors available at https://www.jiraaf.com/risk-disclosure before making an investment.
