What are the types of Bonds one can invest in?
All of us save money to invest, and we invest to save. Saving money without any financial goal serves no purpose. On the other hand, it is essential to identify your risk appetite and investment goals before proceeding with your investment plans. Earlier, Fixed Deposits were considered the safest investment option. Things have changed now, and investors are looking at alternative investment avenues to park their money. Bonds come up here as an option.
Bonds are a low-risk investment option that pays a fixed interest at regular intervals. Governments and corporate firms offer various types of Bonds that allow you to earn interest and achieve your financial goals. The different kinds are:
A Zero-Coupon, also known as Pure Discount Bonds, trades at a discount to face value. It does not pay periodic interest. The money you invest earns interest which gets paid on maturity. You receive the annual return on the principal amount, including the face value and the interest.
A Government Bond gets issued by the Central and State Governments. It gets issued when the Government needs funds. It offers long-term investment options, ranging from five years to 40 years. The interest is either fixed or floating and gets paid semi-annually.
There are times when companies need funds, and they borrow from investors for a fixed tenure. There is a predetermined interest paid throughout the tenure, and that is Corporate Bond. The risk is higher here as compared to the Government Bond. By the end of the term, you get the Bonds face value along with the predetermined interest rates.
This is a Hybrid Bond that has the features of Equity and Debt but not at the same time. You can convert them into a certain number of stocks and get all the shareholder benefits. Hence, you can take the benefit of Debt and Equity at the same time.
Bonds designed to offer protection against inflation are known as Inflation-Linked Bonds. They are issued by the Government and get indexed to inflation, so the principal and interest rates rise and fall with the inflation rate.
Sovereign Gold Bonds
Issued by the Indian Government, these Bonds allow you to invest in gold, but you cannot keep gold with you in the physical form. The interest gets exempted from taxes, and it is a highly secure bond. It comes with a maturity period of eight years with a 2.5% interest rate, and there is no tax earned on SGBs. You can redeem the investment after the first five years.
RBI Taxable Bonds or Floating Rate Savings Bond 2020 are issued by the Reserve Bank of India and have seven years of tenure. The interest rates on such Bonds varies throughout the term. You can see the interest reset every six months, and it gets paid every six months and are low risk.
With so many types of Bonds available today, you must have basic knowledge about Bond Investment. Otherwise, choosing the right one can be a difficult task. If you have a low-risk appetite, Government Bonds are an ideal choice and if you are ready to take on some risk, go for Corporate Bonds.
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