What are bonds and why should you be optimistic about them?

Retail participation in bonds is gathering more steam than ever. Bonds can help investors diversify their portfolio and earn inflation-beating returns

Retail investors are generally well-acquainted with the volatility of the capital markets and the relatively less risky option of parking their income in a fixed deposit (FD). However, diversifying into bonds could be advantageous if you already have a healthy exposure to equities and FDs.

What are bonds?

'Bonds' are loans that a company or a government takes from investors to finance a certain undertaking. As bonds are essentially loans, they also come with a 'maturity date': a fixed date at the end of the bond's tenure, when you shall receive your initially invested income.

What is the coupon rate in bonds?

The coupon rate is another important term in the bond market. Think of a bond's 'coupon rate' as the interest earned from an FD. The 'coupon rate' is a percentage of the initial sum you invested – the bond's face value – and the interest you will earn from the bond every year.

Let's look at an example: if you invest in a 'corporate bond' today (a bond issued by a corporation) whose face value is ₹10,000, coupon rate is 10%, and the maturity date is 5th August 2027, you will receive a sum of ₹1000 every year until 2027. In addition, you will receive your initially invested income of ₹10,000 on 5th August 2027. The maturity of the bond in this example is five years.

What is a bond yield?

Bond yield is the returns you earn from a bond. It is the amount you earn over and above your invested capital. It keeps fluctuating depending on inflation, economic growth, and other factors.

Do bonds have a lock-in period?

Not at all! Bonds allow you to withdraw your invested income before they mature. You can also sell your bond in the secondary market before maturity.

Are bonds popular among Indian investors?

Retail participation in the debt market is increasing every day. The Reserve Bank of India's (RBI) retail direct platform has played a key role, allowing retail investors to directly open an account with the RBI and invest in bonds.

Startups and businesses have also played their part, helping Indians with limited capital diversify and buy bonds seamlessly.

The shift in bond retail investment patterns can also be attributed to the return potential on government securities and corporate bonds. They can earn better returns than FDs despite having the same risk profile.

Are there other kinds of bonds that I should be aware of?

Besides government and corporate bonds, you can also invest in Sovereign Gold Bonds (SGBs). A Sovereign Gold Bond is a wise investment option for any investor and acts as a highly prudent diversification option.

Many institutions, including IDFC FIRST Bank, can help you invest in Sovereign Gold Bonds and earn 2.5% interest payments every year. SGBs do not attract capital gains tax on maturity either, making them an attractive investment instrument. In addition, you are guaranteed the market value of the gold at bond maturity, and the government itself backs the investment instrument.

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