Bond Market in India - Meaning, Types & How to Invest in Bonds

Bond Market in India - Meaning, Types & How to Invest in Bonds

Bond market in India

Investments are classified in two types to put it simply:

• Fixed return investments
• Variable return investments

Investments with a fixed return provide a guaranteed return in exchange for the capital invested. These investments generally have a lock in period with low liquidity. Variable return investments are subject to market forces where the exact return on the investment is not guaranteed till the time the investor exits from the investment. Equities, mutual funds, gold, real estate are variable return investments.

One of the most popular types of fixed return investments are investment bonds.

What are bonds?

Bonds are instruments issued by a borrower to raise capital from investors or the public at large. Bonds are like loans which mature on a fixed date. In return, the borrower pays interest. Depending on the terms and conditions of the bond, the interest can be paid either at specified intervals or on maturity (deep discount bond)

What are the different types of bonds?

Bonds in India are generally issued by Government bodies. Having a government backing to the bonds provides security to the investor that these bonds will be repaid on maturity. However, other private institutions also issue bonds depending on their need.

These are the different types of bonds available for investment in India:

1. Central Government bonds:
These bonds are issued by the Central Government to raise funds. These bonds are issued by the RBI on behalf of the Government. The primary purpose of these bonds is to finance fiscal deficit and meet the shortfall of revenue in the Government budget. These bonds are the safest bonds to invest in, since they are backed by the Government and will be repaid on maturity.

2. State Government bonds:
These bonds are issued by the State Government to meet their fiscal deficits. These bonds are listed on the stock exchange. These bonds are also backed by the Government, making them low risk investments.

3. Municipal and Local authority bonds:
A municipal corporation or a local authority may raise finance to meet funding for specific goals such as constructing infrastructure, public water works etc. These bonds are also rated by credit rating agencies and it is best to go by the rating and past records before investing.

4. Corporate bonds:
These are highly risky bonds since the maturity depends on the track record of the company. Before investing in such bonds, you must do a complete study into the company and its performance.

5. Public Sector bonds:
These bonds are issued by highly rated public sector companies for meeting their growth and expansion needs. These bonds are relatively less risky since PSUs are under the Government. Generally, these bonds are issued by companies where the Central Government is the majority shareholder.

6. Tax free bonds:
Companies such as the National Highways Association of India (NHAI), Indian Railways Finance Corporation, HUDCO, Rural Electrification Corporation (REC) issue these bonds. The interest earned on these bonds is completely tax free in the hands of the investor.

Types of bond markets:

1. Primary market:
This is the market where the borrower approaches investors to raise capital. The issue price of the bonds and the coupon rate is fixed at the time of raising capital.

2. Secondary market:
Most of the bonds are traded in the stock market. They can be sold depending on when the investor wishes to exit from the bond. However, it is to be noted that the price for the bonds depends on how close the bond is to interest payment. As the bond nears the interest payment date, the price goes up. The price and coupon rate of the bond move inversely i.e if the price goes up, the interest rate goes down. This is because the net return to the investor stays the same as when the bond was issued in the primary market.

For example, if the bond is issued at Rs. 1,000 with a coupon rate of 8%, the interest will be Rs. 80. However, if the price goes up to Rs. 1,250, the interest rate goes down to 6.4%. However, the interest payment to the investor remains the same.

How to invest in bonds:

It is possible to invest in bonds in India using your demat account. Since these bonds open for subscription in the primary market, it is possible to apply for them online. If you do your trades through an offline broker, it is possible to fill up a form and submit it offline to your broker as well. The application will then be submitted into the issue.

Once the allotments are made, you will come to know how many bonds you are allotted. The process is similar to equity shares. Bonds have a minimum issue price and you can invest in bonds in India in multiples of the specified number. For example, a corporate bond may have an issue price of Rs. 1,000 and can be purchased in multiples of 5. This means the minimum issue is for 5 x Rs. 1,000 or Rs. 5,000. Further investments can be made in multiples of 5 i.e 10,20,35 etc.

Investing in the primary market is extremely simple and can also be done wholly online through the demat account. It is also possible to exit your bond investment online as well since these bonds are traded in the market. Bonds in India are listed on the stock exchange. Even though the price discovery for bonds is restricted, it offers low liquidity, which means the investor can exit these bonds ahead of their maturity should he wish. Generally, the price of bonds goes up as it nears the coupon payment date. The ideal exit strategy would be to sell bonds as it comes close to the interest payment date to get more than the payment price.

However, in case of deep discount bonds, the funds may be locked in till maturity depending on terms and conditions of the bond. A deep discount bond is a bond where no interest is paid but a higher amount is paid on maturity. For example, a deep discount bond may be issued for Rs. 20,000 and maturity price may be Rs. 95,000 after 10 years. No interest will be paid in these 10 years and the maturity amount will directly be credited to the investor’s account on maturity. Deep discount bonds are available for investment through the demat account or through a broker.

Another way to invest in bonds indirectly is to purchase debt mutual funds that primarily invest in bonds. These can be found out by analyzing the portfolio of the respective mutual funds.

The bond market in India does not have many players. It is dominated by Government bonds and entities. This provides safety and security of capital. The bond market however is very nascent and still growing. With increasing investor interest, bonds in India can turn out to be a fast growing market.


Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


Balanced Mutual Funds – Why You should Invest in Balanced Mutual Funds

Why you should invest in balanced mutual fund? One of the ways to grow your savings is to invest in the stock market. Historically, investments made in the stock market have given a higher rate of return as compared to investments in fixed income products over the medium to long term. But investing in equity is highly risky since the performance of the equity shares oftentimes depends on market conditions as well as performance of the company. Choosing a company to invest in takes a fair bit of research which may not be possible for everyone. The next best alternative is to invest in an equity mutual fund, which too is highly risky for people who don’t have a higher risk appetite. The correct alternative for such investors would be to invest in balanced mutual funds. What are balanced mutual funds? A balanced mutual fund or a hybrid mutual fund invests its corpus in a mix of equity and debt. There are two types of balanced mutual funds: • Aggressive hybrid fund (More than 60% in equity and balance in debt instruments)• Conservative hybrid fund (More than 60% in debt instruments and balance in equity) A balanced mutual fund gives the investor the high growth that equity does and also the stability of a debt instrument. For investors looking to begin investing in equity, choosing a balanced mutual fund is a good way to start. What does a balanced mutual fund invest in? Balanced mutual funds divide their corpus between equity and debt instruments. When it comes to equity, the investments depend on whether the fund is aggressive or conservative. Aggressive funds may also invest in mid cap stocks and small cap stocks. Conservative funds invest a majority of their resources in large cap stocks which may not grow as fast, but are a stable form of growth. When it comes to debt instruments, the best balanced mutual funds invest in a range of instruments such as: • Government of India bonds• State Government bonds• Certificate of Deposits• Non Convertible Debentures• Treasury Bills• Commercial Paper• Company issued debentures and bonds It is possible to find out the portfolio on the mutual fund house’s website or on other finance websites. The debt portfolio is split up based on instruments and the risk level of the securities. Generally, hybrid mutual funds tend to invest in low risk securities. Before you pick one of these funds to invest in, it is better to analyze balanced mutual fund advantages and disadvantages so that you know whether this type of investment is the right one for you. Here are some reasons why to invest in balanced mutual funds: 1. Diversification of risk:Balanced mutual funds provide an excellent way to diversify portfolio risk. By investing in equities, they provide higher returns, however, since some portion of funds get invested in debt, they also stabilize the overall risk of the portfolio. For investors who are conservative, investing in a balanced mutual fund can provide a slightly riskier outlet with a higher rate of capital growth. On the other hand, for aggressive investors, diverting some portion to a balanced mutual fund can reduce the overall portfolio risk. 2. Higher returns:When it comes to balanced mutual funds India offers many alternatives to all types of investors. Conservative investors can put their funds in conservative hybrid funds that put a majority of their resources in low risk debt instruments and the balance in equity. This provides higher returns as compared to investing in pure fixed income instruments. For aggressive investors, these funds provide a fixed return which is useful in case of market downturns. 3. Tax advantages:Investing in an aggressive hybrid fund (more than 60% in equities) will give tax benefits since this gets classified as an equity fund. The gains on this will be taxed like an equity mutual fund with a holding period of 1 year for the gains to become long term. This provides significant advantages to the investor. On the other hand, conservative hybrid funds are classified as debt funds with a holding period of 36 months for gains to be long term. 4. Dividend:There are monthly dividend paying balanced mutual funds which provide dividend to their investors. Putting resources in these funds provides a regular return in the form of dividends as well as capital growth through equity investments. 5. Automatic portfolio rebalancingOccasionally, the balance between the equity markets and the stock markets is tipped to one side. Either of the market can be overvalued. In such situations, you may want to invest more in one of the two markets. However, in other funds, this may not be possible as the funds may be restricted due to the SEBI rules. However, when it comes to balance funds, the fund manager has the leeway to move between the two asset classes. Now that you have understood what are balanced mutual funds, where they invest and why to invest in balanced mutual funds, are you looking at making investments in balanced mutual funds? Here are some IndiaNivesh recommended balanced mutual funds which have given good returns to the investors.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Investment Tips – Stock Market investment Tips in India

The desire of making huge money has always lured investors to the stock market. However, making money in equities is not all that easy. Investing in the stock market requires skills, knowledge, patience and discipline. Apart from these four important factors, you also need to do a great amount of research and hold a sound understanding of the market.The stock market is the only place which holds the potential to double your money or even more in a few years. For that to happen, you must invest smartly. In this article, we will give a lowdown on some of the money investment tips for making an investment in the stock market. These investment tips will not only help you in taking good investment decisions but also in building a good portfolio of investment. Stock Market Investment TipsThe stock market investment tips are as follows:• Keep a Check on EmotionsOne of the common mistakes that investors make in the stock market is that they are unable to control their emotions. Often they take decisions on the basis of short term price movements especially during an adverse event. Controlling your emotions in a volatile market will not only help in holding the investments but also in not taking any illogical decisions. Therefore, controlling emotions is an important investment tip because it protects you from selling the shares when the price movement is adverse. Adopting a practical approach in the stock market will help your investments to grow and save you from unnecessary losses. • Invest After Understanding FundamentalsOne of the important smart investment tips is to invest in the company only after conducting a good analysis. Always remember that you are not just investing in the stock, you are investing in the business model of the company. Before making an investment, always do your research about the fundamentals of the company. You must look at its current valuation, balance sheet, expected future growth, quality of management, P/E multiples, etc. By doing the right analysis, you can find good stocks for long term investment. • DiversificationDiversification is one of the key investment tips while building a portfolio. The very famous saying, “never put all your eggs in one basket” holds true in the stock market as well. You must never invest all or most of your money in a single stock. Diversification is the best possible way to manage risk in the stock market. You should invest in stocks of different companies in different industries or sectors so that any negative news or event in one industry or sector does not dent the value of your portfolio. Diversification allows you to recover your losses even when one sector or industry underperforms. Therefore, it would not be wrong to say that diversification of the portfolio is one of the most important things to do while building a portfolio for the long term. • Know Your Risk AppetiteThe next investment tip while making an investment in the stock market is to understand your risk tolerance. It is a known fact that the stock market is subject to certain risks and you must be prepared to take them because the percentage of returns that can be made here are unmatched. Managing and knowing the risk in the stock market is essential because it is a volatile place and you must stay firm during times of panic or adverse events. You will be able to better manage your risks if you stay cool during the times of financial uncertainty and take decisions analytically. • Avoid LeverageAnother important investment tip is to avoid leverage to execute your stock market strategy. Leverage means borrowed money and it should never be used to trade or invest in the stock market. Trading or investment done with leveraged money looks great when the stock goes up or you make a profit but it can prove to be fatal when the situation is opposite. When you borrow the money, you have to pay the interest along with the principal amount. In addition, if you make losses, the liability further increases. Therefore, if you are looking to invest for the long term, smart investment tip would be to avoid leverage.The above-mentioned share market investment tips will help you in investing money for the long term. These tried-and-true investment tips can help you boost your chances for long-term success.Apart from the above tips, there are a few more things that you as a trader or investor in the stock market should take care of. These are:• It is very important to make informed decisions before investing in any stock. Do proper research about the company, its management, past revenues, future prospects, etc. Conducting sufficient due-diligence before investing will help you better understand the future. • Another important thing is to educate yourself about the stock market. Learn about the different kinds of trading strategies, risks involved, market movements, trends, how to read charts among other things. Once you know the basics of the stock market, you will be in a better position to take investment decisions. • Never be greedy with your expectations. Don’t expect the market to always work in your favour. The stock market is unpredictable and highly volatile. So, determine your entry and exit points before investing. It is also advisable to put a stop loss in place which can help you avoid unnecessary losses. • Avoid herd mentality in the stock market. Meaning, don’t be influenced by the actions of others. If everybody around you is investing in a particular stock, it is not necessary that you also follow the same. Invest only if you are convinced that the company you are investing in is good and will fetch you returns. • It is important to regularly monitor your portfolio. Since the stock market is highly volatile, any news or major economic event can impact the prices of your shares. If you cannot personally review your portfolio due to time constraint or lack of knowledge, you may seek help from professionals.If you require more money investment tips or smart investment tips, you may contact a reputed broker like IndiaNivesh Ltd. With our years of experience in the financial market, you will certainly get many share market investment tips that can help you in building a diversified portfolio.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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