Bonds: Investment Tools for Portfolio Diversification

Bonds have emerged as an ideal investment vehicle for investors looking to achieve their financial goals effectively in the long run. 

Currently, the bond market is sized at about US$2.34 trillion. Government bonds comprise US$1.83 trillion of the pie, while US$510 billion is allocated to corporate bonds, as per a report. About 78% of the overall outstanding bonds in the country comprise government bonds, and 22% of the market is formed of corporate bond accounts. 

Generally, bonds are issued by corporations or governments. They are a type of debt investment that institutions often use to raise funds for the completion of a particular project. Investors are offered predictable returns till the maturity date of a bond. 

While being quite similar to fixed deposits (FDs), the key difference is that instead of depositing the money in a bank, an investor lends it to organisations or government bodies. 

Among the various types of bonds, a few examples include government bonds and corporate bonds. 

Generally, central and state governments are known to issue government bonds. A few of the common examples of government bonds include dated government securities (G-Secs), treasury bills (T-bills), and state development loans (SDLs).

Then, among corporate bonds, there are PSU bonds, which are issued by public sector undertakings (PSUs), companies owned by the government with a minimum of 51% stake. 

Comparatively, investing in PSU bonds carries a higher risk than government bonds.

Similarly, there are corporate bonds, which include private corporations such as non-banking financial companies (NBFCs), which are common issuers of corporate bonds. Such bonds are riskier as compared to government bonds and PSU bonds. 

Bonds are ideal investment tools for those looking for a steady source of income, provide higher returns than FDs, provide help in portfolio diversification, and are a relatively less risky option for those making an entry into the capital market.