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Types of debt investments

The Indian debt market offers a large range of products that can help you meet different financial goals. Each debt investment product varies in terms of return potential, risks involved, tax implication as well as time horizon. So, once you know about the various types of debt instruments, it would be easier to choose the product that best suits your needs.

Some popular debt instruments in India are:

✓ Bonds

Bonds are issued by government undertakings, financial institutions or large corporates. Bonds offer a fixed rate of interest for the entire lifetime of the product.

There are various types of bonds. For example, investors who look for an assured income over the long-term can think of investing in government bonds. Investor who does not need regular income but want a guaranteed yield can consider to invest in ‘zero coupon bonds’.

Tips to invest: Bond investment strategy can vary depending on your investing style.
o If you invest for capital appreciation plus income, then you may want to invest in bonds when prices are low and later sell them at a higher price before maturity.
o In case you want to maximize your income with capital protection, you may consider investing in high-yield bonds with ‘buy and hold’ strategy.

✓ Debentures

Unlike bonds, debentures are the debt instruments that are not secured by collaterals or backed by government undertakings. It totally depends on the reputation and the creditworthiness of the issuer.

Companies offer debentures to raise capital for medium to long terms and it reflects in the company’s balance sheet.

Tips to invest: Investors can choose the interest payout or the cumulative option, depending on their requirement. If you are looking for regular income, you can opt for quarterly or monthly pay out of interest. If you opt for cumulative option, reinvested interest will be paid on maturity. Debentures generally offer higher rate of interest as compared to bank fixed deposits. However, the only point of contention for debentures is the credit worthiness of the issuer.
Therefore, it is important to consider the credit rating of the issuer before investing in the debenture.

✓ Debt mutual funds

Debt mutual funds invest a large part of their corpus in fixed income securities. From a taxation point of view, any mutual fund which holds less than 65% of the total holdings in equity are considered debt mutual funds.
Some popular examples of debt mutual funds are FMPs or fixed maturity plans, MIPs or monthly income plans, short-term and long-term debt plans as well as liquid or cash funds.

Tips to invest: Selection of fund type needs to be based on the investment objective. If your plan is to generate regular income along with guaranteed yield, then you can consider FMPs. If you have surplus cash lying idle, which you may want to use later, say within a few months, you can park your money in liquid funds for the time being.

✓ Certificate of Deposits

Certificate of Deposits (CoDs) are term deposits issued by banks, credit unions and select financial institutions in India. CoDs are issued in dematerialized form. Maturity period of certificate of deposits can vary from seven days to one year if issued by banks. If issued by financial institution, the maturity period ranges between one and three years.

Tips to invest: Certificate of Deposits offer competitive rate of interest when compared to government securities. CoDs can be considered as a good short-term investment option. However, investments in certificate of deposits are primarily made by institutional investors only.

✓ Commercial Papers and Treasury Bills

Commercial papers, or CPs, are issued by corporates in the form of promissory notes. Individuals, banks, corporates and foreign institutional investors can invest in commercial papers.

Treasury Bills, meanwhile, are short-term debt instruments offered by the Reserve Bank of India to investors for parking their short-term funds.

The last word

Debt investments provide the cushion to your overall investment portfolio. They also help in diversification, capital protection and income generation.



Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.