Types of Bonds Exploring for Investor

Written by Updated on 23 May, 2024

Planning to invest your money in a secure option and earn interest on it? Bonds can be the most appropriate investment tool for you. Let’s look at the different types of bonds available for investment.

What Are The Types Of Bonds For Investors.


Amidst a rapidly evolving investment landscape, bonds have emerged as a viable choice for investors, offering stability and attractive returns. This rise in popularity can be attributed to several factors, including the desire for additional income generation, capital preservation, and portfolio diversification.

Bonds provide investors with the opportunity to lend funds to governments or private corporations in exchange for regular interest payments and the return of principal on the maturity date. By understanding the different types of bonds available, they can harness their benefits and navigate the dynamic investment realm with confidence.

Types of Bonds


    1. Government Securities Bonds

Government securities bonds are issued by the state or central government of India. Usually, these are long-term investment bonds ranging from five to forty years. Through these government securities bonds, small investors can invest small amounts in low-risk securities and earn interest.

The following bonds come under Government Bonds -

      • Sovereign Gold Bonds

These bonds are issued for investors who want to invest their money in gold without keeping gold in physical form. The interest earned is tax exempted on these high-security bonds issued by the RBI.


      • RBI Bonds

The Reserve Bank of India issues Floating Rating Saving Bonds (FRSB) with a term of 7 years. Also known as RBI taxable bonds, these bonds have floating interest rates that keep changing throughout the tenure. The RBI fixes the interest rate every six months, which means investors get paid twice a year rather than receiving the returns on maturity.


    1. Corporate Bonds

Companies issue corporate bonds to borrow funds from investors for specific durations and pay them interest during the tenure. Often, instead of taking Business Loans, companies raise capital through these bonds and cover their expenditures. Once the tenure ends, they repay at face value.

Corporate bonds offer the opportunity to receive regular interest payments during the bond's tenure. The interest rate, determined at issuance, represents the percentage of the bond's face value paid as interest.

If you are an investor looking to earn a fixed interest for a specified investment tenure, this bond can be a favourable option for you.

The following bonds come under Corporate Bonds -

      • Floating Rate Bonds

Rather than paying fixed interest income for particular periods, floating rate bonds have floating interest rates that vary during the tenure based on market conditions. The floating coupon rates highly depend on the repo and reverse repo rates set by RBI in India. These bonds are typically issued by government entities, financial institutions, and corporations seeking flexibility in adjusting interest payments in response to changing market rates.

      • Convertible Bonds

These types of bonds offer the features and benefits of both debt and equity, though not simultaneously. During the tenure, bondholders can convert these bonds into a predetermined number of stocks or equity shares and become the company’s shareholders. Consequently, they get all the benefits that shareholders are entitled to enjoy. That means you can enjoy the benefits of both equity and debt instruments by investing in these types of bonds.

    1. Zero-Coupon Bonds

As its name suggests, a zero-coupon bond does not give any interest to the investor during the tenure. Instead of receiving periodic interest payments, investors purchase these bonds at a discounted price compared to their face value. This discounted purchase price allows investors to potentially profit from the difference between the purchase price and the full face value received at maturity. Upon maturity, investors are then paid the full face value of the bond.

 

    1. Inflation-Linked Bonds

This type of bond protects against inflation, cutting out government-issued investments' inflation risk. Inflation-linked bonds, also known as inflation-indexed bonds, are special types of bonds where the interest payments and principal value are adjusted to account for changes in inflation. This means that investors can protect their investments from the effects of inflation and ensure their purchasing power remains relatively stable. The interest rates in these types of bonds fluctuate according to the inflation rate.

    1. Callable Bonds

In a callable bond, the issuer can call back the bond they issued at a pre-agreed price and date. Investors prefer them because they offer high coupon returns as compared to non-callable bonds.

    1. Puttable Bonds

In a puttable bond, the bondholders can return the bond they purchased. That means investors can demand their principal amount’s early repayment. Since it is not a favourable situation for bond issuers, this type of bond does not offer the same high returns as callable bonds.

    1. Perpetual Bonds

Perpetual bonds do not have a maturity date. Instead of repaying the principal amount to the investors, the bond issuer pays steady interest to the bondholders.

Conclusion


At the end of it all, government bonds are the most secure among different types of bonds due to their sovereign guarantee.

Investing in a variety of bonds offers individuals a secure path to wealth growth. Corporate bonds can be a secure and lucrative option for investors seeking higher returns. With a range of corporate bond options available as Axis Direct, you can diversify your portfolio and potentially grow your wealth.

 

Axis Direct is a leading investment platform that can assist you in managing your investments, providing expert guidance, research insights, and other benefits to enhance your investment experience and grow your wealth.