Think of bonds as somewhat like a house mortgage. Similar to a house mortgage if a borrower stops making payments or fails to repay the principal, the lender can sell the house as it is a physical security for the loan.
A bond is like that loan. The issuer of the bond i.e. the corporation or a government is the borrower and the investor or holder of bond is the lender. The borrower promises to pay the investor a predetermined annual interest rate, called the bond’s coupon rate, in equal or regular payments for as long as the investor holds the bond. The issuer also agrees to pay the bond’s principal or par value on a determined maturity date. The interest payment can be made in monthly, semi-annual or annual installments.
Different types of bonds offer investors different options. For example, there are bonds that can be redeemed prior to their specified maturity date and bonds that can be exchanged for shares of a company. Other bonds have different levels of risk, which can be determined by its credit rating.
Bond rating agencies like Moody’s and Standard & Poor’s (S&P) provide a service to investors by grading fixed income securities based on current research. The rating system indicates the likelihood that the issuer will default either on interest or capital payments.
Investing in bonds
In India, the bond segment market is not that active as in other countries like the USA. But still, investors can buy bonds either directly from the corporation’s public offer or through registered bond brokers. Around 95% of bonds in India are privately placed and hence are not advertised at all. Investors can buy bonds and sell them via bond brokers in India. They are market makers and have created a rich and deep debt market.
Government bonds, unlike shares, are not traded on the stock market. They are sold through official distributors and designated branches of banks and post offices. To invest in bonds, you will need to visit any branch designated with applications and submit a filled-up application form. After your request is processed, you will receive a bond certificate in your name.
Eligibility for GOI Savings Bonds, 2018
The Bonds may be held by-
- an individual, not being a Non-Resident Indian
- in his or her individual capacity, or
- in individual capacity on a joint basis, or
- in individual capacity on anyone or survivor basis, or
- on behalf of a minor as father/mother/legal guardian.
- a Hindu Undivided Family.
The process of investing in corporate bonds is as simple as investing in any other instrument. When a company issues bonds, you will have to fill out an application form and submit it to any branch of the issuing company with the application fee and required documents. These documents may include a copy of your PAN card, address proof, identity proof, etc. If you have a demat account, you can fill out the details in the form, and the bonds will get credited to it. In case you do not have a demat account, you can choose to receive the bonds in a physical format.
Alternately, you can visit http://www.goldenpi.com for the purchase of bonds from both the primary (public issue) market and the secondary market.
Alternative of investing in Bonds
While the process of investing in bonds is quite simple, selecting the best type of bond might be difficult, especially if you are new to making investments in the debt market. One of the best alternates is investing in bond mutual funds. Mutual funds are safer options than direct investment in bonds.
Investment in Debt MFs must be done according to your investment horizon.
You can check out the same here.
Consulting a financial professional
If you are unsure of the facts or need guidance in the process, taking professional advice can clear the picture for you.
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