Having a diversified investment portfolio is essential for a secure financial future. It not only ensures consistent and steady returns for you but also shelters you from extreme volatility in the market. There are various investment options available to invest your money and make it work for you.
Some investment opportunities carry a significant amount of risk but offer higher returns as well, such as equity market investments. There are some investments that offer you lower returns but have minimal risk attached such as bank deposits. Getting the right balance of various investments will help balance your portfolio. One of the most popular investment options is Bonds. Let’s understand more about bonds and how the Indian bond market works.
- What are Bonds
In India, bonds are issued by the Government as well as the private-sector entities, to raise money for a specific purpose. They are essentially interest-bearing debt certificates. Bonds are like a loan which carries an interest rate and must be repaid on a specified date. Government and large corporations issue bonds when their funding requirement can not be met from any other source. Bonds have a specified maturity period upon completion of which the borrower (Government or Private Corporation) will return the money to the lender. The money will be returned along with interest, specified at the time of issue, and specified intervals.
- Different Types of Bonds
You need to have a better understanding of the different types of bonds issued in India. This will help you make an informed decision. The entity issuing the bond must be reliable and trustworthy for the safety of your investment. There are different types of bonds that you can invest in.
(i) Government Bonds:
Known popularly as ‘Sovereign Debt’, government bonds are issued by the Central Government to raise money from the general public. It is a risk-free investment that offers stable returns and is suitable for investors with a low-risk appetite.
(ii) Municipal Bonds:
Municipal bonds are issued by the State government or the local government agencies to raise money to fund government activities. As per SEBI, municipal bonds need to have a rating above the investment grade and have a maturity period of 3 years, before being issued to the public. These bonds are also considered a safe investment option as the State Government backs them.
(iii) Corporate Bonds:
Large financial corporations and financial institutions issue corporate bonds. They yield higher returns, but the risk factor is also high. The maturity period on these bonds can go up to around twelve years. It is essential that you do a background check on the company or ascertain its reliability before investing any money.
(iv) Public Sector Bonds:
These bonds are issued by Public sector corporations, where the share of the Central Government is more than 50%. These bonds are implicitly guaranteed by the Union Government and are considered a safe investment option.
(v) High Yield Bonds:
These bonds are issued by companies who have just entered the market and are yet to establish themselves in the market. These bonds offer high returns but have a high-risk factor too. They are meant for investors with a high-risk appetite.
- The Bond Market in India
The Indian bond market comprises of various types of bonds as mentioned above. The market can be divided into two categories.
(i) Primary Market
In the primary bond market, the entity that needs to borrow money invites the general public or investment banks to purchase their bonds. The bonds are issued for a fixed tenure at a pre-specified interest rate.
(ii) Secondary Market
In the secondary market, the investors who had purchased the bond previously, sell their bonds to other investors. Various brokers operate in the secondary market who facilitate these transactions.
The Indian bond market comprises of both Government and Private sector bonds but is mainly dominated by government bonds. Government bonds are considered highly secure and enjoy excellent liquidity. The trading volumes in the Indian bond market have increased over the last ten years, but around two dozen entities dominate the market. Most of the participants are rated AAA, and almost 80% of the trade is direct, the risk factor is minimized.
The liberalisation of the economy has encouraged Indian companies to seek debt from foreign countries. Similarly, foreign investors are also investing in the Indian bond market. Since the last two decades, the Indian bond market has diversified significantly and contributed greatly to the growth of the country’s infrastructure. But in comparison to the equity market, the bonds market in India is still in its nascent stages, and there is good potential for growth.
The bond market in India has a crucial role to play in the development of the economy, and the government is undertaking various measures to strengthen the market in India.