7 things you should know before investing in bonds in India 

Introduction 

India, the fastest-growing economy globally, offers some great investment opportunities. Investing in bonds is one of them. 

Bonds are the go-to asset class for fixed income investors. Although they’re not always liquid, they create low-risk returns which are widely accepted in the market.  

Investing in bonds is a great way to diversify one’s portfolio or knowing importance of bonds in your portfolio and earn a better return. 

Different types of bonds are available in India depending on the issuer, tax benefits, coupon rates, and options.  

Top 7 things to Consider Before Investing in Bonds 

Investing in bonds can be a whole new experience for most investors as the central bank or government of India bonds has allowed retail participation recently. There are various online portals like BondsIndia.com, which will show you in simple steps how to invest in bonds. 

7 things you should know before investing in bonds in India 

The vital things that investors might consider before they buy bonds online are: 

1. Yield   

One of the crucial factors that an investor can consider before investing in bonds is yield. 

The return that investors earn for holding the bond till maturity is known as yield.  

The yield of the bond & the bond’s price is inversely related. So, if the yield of the bond decreases, the bond’s price will increase, and if the yield of the bond increases, called as higher yield bond, the bond’s price will fall. 

2. Risk 

For investors, it would be best to analyse the risk involved in the bond before investing.  

Investing in bonds is not as risky as investing in stocks, but it does come with some risks, such as inflation risk, credit risk, interest rate risk, etc.  

Before making an investment decision, investors need to be well informed of these risks. 

3. Rating 

All the bonds in the market come with a rating. AAA to BBB is considered investment-grade bonds, and BB to D is considered non-investment-grade bonds.  

The credit rating of the bond shows the borrower’s creditworthiness. The bond with the highest credit rating is considered to be the safest and vice versa. If the rating of a borrower is poor, investors might not get their money back. 

So, to make a sound financial decision, investors can analyse the credit rating of the bond and should always invest in higher rated bonds

4. Bond is secured/unsecured 

Before making an investment decision, investors can examine whether the bond is secured/unsecured. If a bond is secured, the investor’s money will be protected if the borrower defaults. On the other hand, if it is not secured, investors might lose their money if the borrower defaults.  

5. Taxation 

Just like any other asset, income from bonds is also taxable.  

The interest earned by investors on the bond is taxable as per their slab rate. However, any income generated on the sale of bonds is considered capital gain and taxable as short-term/long-term capital gains. 

There are bonds like tax-free (zero-coupon) bonds which do not pay any interest, so there is no tax on interest income, but capital gains will be taxed.  

If investors have a house property and they sell it, they can invest these proceeds in 54EC bonds or capital gain bonds, which will provide them 100% tax exemption on the long term capital gain earned by selling the property.   

6. Option attached with bonds  

Many bonds come with embedded options such as – the call option & put option. 

The call option gives the issuer the right to call back the bonds from the bondholders before maturity. The issuer usually does this if the interest rates start falling. This is also known as call risk. 

On the other hand, in a put option, the bondholders can return the bonds before maturity to the issuer if the interest rates start increasing.  

Thus, investors are advised to analyse whether any such option is embedded in the bonds they wish to purchase.  

7. Debt obligations of the issuer  

Before investing in a bond, investors are recommended to assess the issuer carefully and know how to invest in bonds in India. They can check the repaying capacity of the issuer, the purpose of taking a loan, how they are planning to pay the loan, etc. To do this, review the financial statements of the issuer.  

Conclusion 

Unsurprisingly, bonds are one of the most widely held types of investments in India. Even though they are less riskier than other instruments, they are subject to a different set of risks, which have been informed by market dynamics since the advent of modern financial markets. 

Investing is not a game or a one time task.  

Thus, an investor needs to carefully analyse the important considerations before making an investment in a bond. 

Investing in bonds will not only require attention at the time of investment but throughout the time the bond is held by the investors. 

Published by ivankhanna

I am a writer

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