Who can buy bonds?

bonds are considered one of the safest investment choices compared to stock, derivatives, and other financial instruments. They offer steady income to the investors along with a return of full invested capital. Several types of bonds include agency bonds, government bonds, corporate bonds, municipal bonds, treasury bonds, etc. Before you buy any bond, it’s pivotal to know the bond variety and the volume of returns it generates. This blog elaborates on the different types of bonds in detail.

Types of Bonds

The purpose of bonds is to elevate the income levels of the investor. However, there are many types of bonds in the bond market and investors have to be wary before investing in a bond. Let’s jump ahead and understand the varieties of bonds and who can buy these bonds.

Zero-Coupon Bonds

Zero-coupon bonds don’t pay any interest and are traded at discount. Upon maturity, the face value of the bond is returned to the investors. Here, the return for the investors is the difference between the discounted bond price on purchase and the face value return of the bond after maturity. There’s no reinvestment risk attached to these bonds but there’s an interest rate risk.

Government Bonds

Just like corporations need funds to operate and facilitate the proceedings of their business and for other purposes like expansion and growth, the government needs money to elevate the welfare of society. So, they issue government bonds to the public in return they pay interest to the investor at certain intervals. Once the bond hits maturity, the principal amount or the bond’s face value is reimbursed to the investor.

These bonds are issued by the government and supervised by the Reserve Bank of India and are tax-deductible. Now, who can buy these bonds? Retail investors can trade these bonds on the stock exchange without the facilitation of a third party or a stockbroker. However, investors are required to have a Demat account to keep these bonds. Can individuals buy these bonds? Yes, they can directly put their money in government bonds by simply creating an account with the RBI.

Corporate Bonds

Compared to government bonds, these are quite risky, hence the higher interest rate. In return, the investors receive interest at either a fixed predetermined rate or a floating rate. Once the bond hits maturity, investors get back their principal in full. The top-quality bonds are Triple-A bonds whereas the low-rated bonds are called junk bonds. All the bond rankings are given by the U.S rating agencies like Standard & Poor's Moody's and Fitch.

Municipal Bonds

These bonds are issued by the state government to raise capital to meet the public needs in the economy, especially for development. Now, who can buy bonds? Investors looking for a tax-free income stream can invest in municipal bonds. Also known as muni bonds, this debt security investment avenue looks appealing for high-tax bracket investors as they are excluded from all taxes.

Inflation-Linked Bonds

Inflation is one of the significant factors that affect the prices in the market. It’s also a deciding factor in stock market oscillations and price-fixing. So, another way to secure your investment from inflation is by putting your money into inflation-linked bonds. The Commonwealth of Massachusetts was the first one to issue this bond in 1780. Since then, several countries started issuing these bonds as well. These bonds are connected to an inflation measure index like the Consumer Price Index (CPI), Retail Price Index (RPI), etc.

Sovereign Gold Bonds

There are myriad ways to invest in gold and sovereign gold bonds are one of them. The Reserve Bank of India issues these bonds at the behest of the government. The denomination will be in grams of gold and the initial investment allowed is 1 gram of gold. The maximum permissible limit per individual is 4 kg. The bond price is determined based on the simple average of the closing price of gold of 999 purity. This rate will be drafted by the India Bullion and Jewellers Association Limited before the subscription.

Can individuals buy bonds?Anyone can buy these bonds from an agent or at a top stock exchange like NSE or BSE. Investors can use these bonds as collateral at the time of the requirement of a loan. According to the Income Tax Act, 1961, the interest on sovereign gold bonds is taxable. However, holding the bond till the end period eliminates you from paying capital gain tax.

Convertible Bonds

Sometimes investors change their minds and want to move from the debt market to the equity market. That’s where convertible bonds come into the picture. By buying these bonds, investors have the leeway to shift from debt markets to equity markets. This bond allows investors to enjoy interest returns on the bond as well as own equity shares and become part-owners of a particular company. However, the conversion part is left to the choice of the investor.

RBI Bonds

These bonds are issued by the government and they can be bought at the nationalized banks in India. Only resident Indians can buy RBI bonds, and non-residents are not qualified to avail of these bonds. The maturity period of RBI bonds is 7 years from the date of issue. Anyone can buy these bonds as the minimum investment limit starts at Rs 1000/- Interest on these bonds is paid half-yearly. These bonds are taxable and non-transferable. Unlike stocks, these bonds cannot be used as collateral security to get loans from banks.

Benefits of Bonds

Let’s understand what bond investments bring to the investors’ table.

Capital Security: Investing in stock markets can be risky as there’s no guarantee that you’ll get back the principal amount. However, that’s not the case with bonds. Compared to equity markets, the bond market is far better and less risky. If you are a conservative investor or someone who’s looking to secure their capital and diversify their portfolio, bonds are a perfect add-on to your investing list.

Proper Inflow of Income: Although the stock market offers considerable returns, there’s a higher chance of losing all the money too. With bonds, they offer relief to the investors by delivering sound income at certain intervals. Even though the returns are lower than equities, there’s a signed guarantee that the investor gets back his principal safely post maturity. Additionally, investors can earn additional income on their regular earnings.

Offers Diversification: Bonds are another best preferable investment option if things go south with the stock market. They not only offer security but also provide the scope of diversification since there are numerous types of bonds to invest in.