For fixed income holders, bonds can be a conservative investment option. When you invest in bonds, you are essentially lending money to the institution issuing the bond. In return, you get interest. Bonds may include, among others, government securities, treasury bills and corporate bonds. In a very volatile market, bonds can be a good investment option to hedge your portfolio.
Why invest in bonds?
Investing in bonds is a prudent way to diversify your fixed income portfolio. Interest received from bonds can supplement your main income. If you have a low tolerance for risk, which means you don’t want to take too much risk with your investments, bonds may be a good choice for you. Bond income is easily predictable and also preserves your capital.
Government and corporations raise capital through which they fund various ongoing projects and issue bonds. Being fixed income products, they carry less risk than equities and offer a good balance to your portfolio.
How to buy corporate bonds in India?
As the name suggests, corporate bonds are issued by companies to investors to raise capital. A corporate bond is first issued in the primary market and then traded in the secondary market from which you can buy it. Supply and demand, current interest rates, and liquidity are some of the major factors determining bond value and yield.
There are two types of corporate bonds:
- Based on maturity
- Based on coupon
While perpetual bonds, long-term bonds, and short-term bonds are maturity-based, coupon-based ones include zero-coupon bonds and fixed-rate bonds. Before investing in a corporate bond, research the company and its fundamentals. Check out its financial statements, and it is in your best interest to invest in the bond of the company that is financially strong and well established. If you want to invest in corporate bonds, you must have a Demat account where the purchased bonds are deposited after purchase.
How to buy municipal bonds in India?
The concept of municipal bonds is not new to the country. The Bangalore Municipal Corporation was the first entity to issue municipal bonds. The Securities and Exchange Board of India (SEBI) in 2015 issued regulations for issuing municipal bonds. These bonds are traded in the primary and secondary market and you can buy them through brokerage firms, banks and bond brokers.
To purchase municipal bonds in the primary market, you must follow the retail order period process. However, it is prudent to only go into it if you are ready to invest a large amount, because in the primary market, bonds are issued in high denominations. To buy bonds on the secondary market, you must have a Demat account. After that, you can buy bonds from brokerage firms, banks or bond brokers.
How to buy government bonds in India?
From time to time, the government also issues bonds to the public to raise capital. Here are some ways to buy government bonds in India:
Gilt mutual funds can be a convenient option if you want to invest in government bonds. These funds are a class of mutual funds that invest only in bonds and fixed income securities. It is essential to note that gilt funds are slightly different from bond funds which may invest in corporate bonds. Gilt mutual funds invest entirely in government securities. However, there are a few things you need to consider before investing in mutual funds.
The expense ratio is one of the main things you need to consider when investing in mutual funds. A high ratio can eat into your returns, so it is essential to choose a fund offering a competitive ratio. The investment horizon is another essential consideration before investing. Typically, the gilt fund portfolio matures within three to five years. Therefore, you must have a similar investment horizon to get the most out of your investment.
Direct investment is another option for buying government bonds. All you need to do is have a demat account and a trading account with a brokerage. Once you have them, you can buy and sell bonds according to your choice.
RBI Retail Direct, launched last year in November, offers another opportunity for investors to invest in bonds. If you’re looking forward to investing directly in government bonds, RBI Retail Direct can help facilitate the same. If you want to invest, you must have a direct gilt account. To open an account:
● Visit the RBI Retail Direct website
● Keep the following documents handy: PAN card, bank details, e-mail and a valid mobile number
● Once these elements are ready, click on “Open an RBI Retail Direct account”.
● Select “Register here”
● Enter details including your name, PAN card, date of birth and mobile number
● Verify with the OTP sent to your mobile number
● Once you have verified, an overview page will appear, where after re-verifying the information, you must click on submit
● Next, you need to complete the KYC procedure. Once done, you must complete additional personal information and report under PMLA and FATCA. In addition, you must confirm your address
● Select your bank and import a copy of the blank check
● Once you have done so, an amount is credited to your account which you must enter to complete the bank verification. Mail it, you need to fill in the candidate information.
● Then you will be redirected to the application summary page where by clicking “Submit” the registration process is completed
Investing in bonds through RBI Retail Direct has certain advantages. You do not have to pay any fees for opening and managing the account. Although government bonds are not exposed to credit risk, they do carry interest rate risk. However, note that here too, you should hold the bonds until maturity, as selling them in a rising interest rate scenario can result in losses.
Note that the purchase proposal can be a bit tricky if you are buying bonds on the secondary market. In such a scenario, gold mutual funds may be a better option as they provide a diversified portfolio and help you contain volatility.
Buy bond ETFs
Buying bond ETFs is another way to invest in bonds. Bond ETFs are passive investments and trade like stock ETFs on the stock exchange. These ETFs invest in bonds like traditional bond mutual funds, and because they are passive investments, they have much lower costs than active funds.
They defined maturity periods ranging from 3 to 10 years. If you’re saving for short-term goals and don’t want too much risk, you might consider investing in bond ETFs.
Bond platforms are another way to invest in bonds. To invest, you need to open a trading account on these platforms after completing the KYC formalities. Although the minimum ticket size varies between platforms, most platforms allow you to invest from INR 1,000.
Through these platforms, you can buy government bonds, corporate bonds, and perpetual bonds, among others. These platforms provide a secure environment from which you can perform the required transactions. However, before choosing any platform, check out its review and do some due diligence.
There are some key things you need to consider when investing in bonds. Note that interest received from bonds is fully taxable, and if you fall into the high tax bracket, your tax expenditures may increase.
Also, when buying bonds, you should ensure that the securities are of high quality (AAA rated). Otherwise, you may find it difficult to sell in the secondary market. In other words, liquidity can be an issue with low quality securities. That said, if done right, bonds can help you easily diversify your portfolio and weather periods of volatility with ease.