People across age groups find the share market to be an attractive avenue. However, a lot of us, have some inhibitions about entering this inciting landscape or opening a demat account.
The risk of losing money is the most common reason that deters people from moving towards the share market.
For all those who are keen to enjoy the rush that comes with the volatility of the market, but do not want to gamble much with their hard-earned money, bonds are the best solution. Let’s dig in.
Bonds and Types of Bonds
Bonds are high-security debt instruments that are issued by companies. Mostly issued by corporates and the government, bonds are aimed at raising money. The money/ capital that is collected is used by the companies to fund their business operations.
At the end of the tenure, which is pre-decided, the issuers extend a portion/ percentage of the amount at fixed or adjustable rates.
Let us take a look at the most common bonds and types of bonds knowing their features will help you make informed decisions when you start your investment. :
- Government Bonds
Issued by state and central governments, government bonds are used to fund operations. These bonds guarantee principal and interest repayment. As they are backed by the government they are said to be the safest bonds. They come with long maturities, typically 5 to 40 years, offering fixed or floating interest rates for lower-risk, lower returns.
- Corporate Bonds
Companies of different sizes need funds for various needs like expansion or purchasing equipment, and land. Thus, they issue corporate bonds These medium to long-term investments typically mature in over a year, paying monthly interest and principal upon maturity. In most cases, corporate bonds offer higher yields as compared to savings and fixed-deposit accounts.
- Sovereign Gold Bonds
Want to invest in gold without investing in gold? Then sovereign gold bonds are the right choice where you can grow your wealth while earning interest. Holding the bonds till maturity can exempt you from capital gains tax.
- Convertible Bonds
These bonds offer the security of a fixed income, which can be converted to the same company’s stock. You can change the bonds into equity as per the pre-specified terms.
Types of Risk in Bonds
While bonds are said to be a safer way to invest, just like any other investment product, they do come with their own set of risks. Take a look at the types of risk in bonds that you can expect:
- Interest rate risk is the peril of bond prices decreasing as market interest rates rise. Newly issued bonds offer higher coupon payments, making older bonds with lower rates less appealing.
Tip: If you can, prefer investing in short-term bonds. - The danger of not being able to reinvest the proceeds from a bond at a similar or higher interest rate is called reinvestment risk.
- Your bonds lose their value due to inflation. The returns you get might not be able to beat inflation.
Tip: Consider investing in inflation-indexed bonds to safeguard against purchasing power erosion. - Credit risk is the risk that your insurer cannot meet their obligation and cannot repay the value.
Tip: Invest in high-rated bonds or government bonds.
How do I Invest in Bonds in India?
Once you have a clear idea of bonds, their types and the risks they come with, you will be able to decide about investing.
When you are ready to start your investment, you can do so through a broker. You can open demat account and invest in the preferred bonds through an online stockbroker. If you wish to diversify your investment across various bond types you can also explore bond ETFs listed on stock exchanges. This will offer you convenience and flexibility.
Conclusion
Before you invest your hard-earned money it is only prudent to acknowledge and plan for the associated risks. While some risks can’t be eradicated, adept management is key to navigating them effectively.
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