How To Invest In Bonds In India?

Bonds are one of the safest places where one can invest money. They provide a regular income stream, and you accurately predict your returns over their tenure. As an investor, the predictability of returns is exceptionally vital in planning your finances for the long term. If you already trade in shares, these securities can be outstanding for portfolio diversification.

Corporates raise funds to finance their operation through bonds. India’s government uses them to fund development projects and control the money supply. Once you buy a bond, you become a creditor or debtholder for the issuer. You are entitled to receive a coupon or regular interest payments (mostly paid annually or half-yearly). 

Types of bonds

As per your need, you can purchase different bonds. India offers 7 types of bonds that you can invest in. 

-G-Sec

Government securities bonds are issued by central and state governments in the country, and governments use these to fund their development projects. So, they are ideal for long-term investment (5 years to 40 years). These debt instruments are the safest option for you to invest your money, and you earn half-yearly interest payments and principal amount at maturity.

-Corporate

Companies issue these debt instruments to borrow money from investors for a fixed period. In return, they offer a fixed interest rate throughout the tenure which can be between 1 year to 30 years. At maturity, you get back the principal amount along with interest. 

-Zero-coupon

Zero-coupon securities do not pay interest but are traded at a discounted price. Short-term zero-coupon securities mature in less than a year, while long-term zero-coupon securities have a maturity period of 10 to 15 years. At maturity, investors receive the face value.

-Convertible

Bondholders with convertible securities can convert their securities into equity stocks of the company. After conversion, you can avail all the benefits of being an equity shareholder of a firm. They have a tenure of 18 to 24 months. You can either keep your securities till maturity or convert them into shares. 

-Inflation-linked

These securities provide a hedge against inflation. Both principal and interest rates fluctuate depending on the inflation rate in the country. Indian government issues these securities and pays interest on a half-yearly basis. In case of deflation, the government guarantees a fixed interest of 1.5% to investors. If you invest in these securities, you can be sure that your money retains its purchasing power. 

-SGBs

Reserve Bank of India, on behalf of the government, issues sovereign gold securities to people who do not want to bear the risk of holding physical gold. The tenure lasts for eight years, and you earn a fixed interest rate semi-annually throughout the term. An individual can hold a maximum of 4kg of gold, while trusts and other entities have an upper limit of 20 kg. If you invest in SGBs, you are eligible for tax deductions under the Income Tax Act, of 1961.

-RBI 

The RBI securities have no limit on the amount you can invest. However, you must invest at least Rs 1000. If you invest in these, you are entitled to receive interest payments every six months during the 7-year tenure, and the interest rate is floating and resets every six months. You must also pay tax on interest from these securities as per your income tax bracket.

So, how to invest in bonds? Read on.

How to invest in bonds?

There are primarily two ways you can invest in bonds in India:

-Direct investment

For direct investment, you will first need a Trading and Demat account, and then you will have to register yourself on the stock exchange. After registration, you can start placing your orders on the stock exchange.

You can also buy these securities through a stockbroker. However, you will have to go through the bidding process, and your allocation will depend on bids of institutional investors and market yield.

-Mutual funds

If you don’t want to speculate, you can take the safer route and buy units in mutual funds that invest in bonds. You can invest in both government and corporate securities through this method. However, you will have to pay the cost of owning a mutual fund, reducing the overall return. 

Investing via mutual funds reduces risks vastly. Besides, professional managers handle mutual funds. Hence, they invest your money in profitable market security.

3 different ways to buy bonds in India in 2024

There are three primary ways in which you can buy bonds:

- Through a broker: The first and most traditional method of buying bonds is through a broker. It works similarly to buying a stock and requires careful due diligence. Make sure to research your options well and select an issuer that is capable of repaying their obligations.

- Through bond mutual funds and ETFs: Bond mutual funds and ETFs offer a convenient way to invest in a diversified portfolio of bonds. These funds pool money from multiple investors to invest in various bonds, reducing the risk associated with individual bonds. This method is ideal for investors seeking professional management and diversification without having to select individual bonds.

- Through RBI Retail Direct: RBI Retail Direct is an initiative by the Reserve Bank of India, allowing individual investors to purchase government bonds directly from the RBI. You can access bonds online, with options to buy, hold, and redeem them through the RBI's platform.

Wrapping up

Now that you know all the types of bonds available to you and how to invest in bonds, you can easily add them to your portfolio. Generally, corporate securities offer better interest and returns, but government security carries minimal market risk. So, thoroughly assess your financial position before investing in one.

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Frequently asked questions

1. Can I invest Rs. 1,000 in bonds?

Yes, you can invest Rs. 1,000 in bonds. Some government bonds and corporate bonds are available in smaller denominations, making them accessible to retail investors.

2. Can I directly invest in bonds?

Yes, you can directly invest in bonds through brokers, the stock exchange, or through RBI’s Retail Direct platform.

3. Are bonds a good investment?

Bonds can be a good investment, especially for those seeking stable returns and lower risk compared to equities. They are ideal for conservative investors and those looking to diversify their portfolios. 

4. Is RBI bond tax-free?

No, RBI bonds are not tax-free. The interest earned on RBI bonds is fully taxable under the Income Tax Act. However, certain bonds may offer tax exemptions on interest income.