Bonds are a type of debt instrument that is issued by a government or a company. When you buy a bond, you are lending money to the issuer and they agree to pay you back the principal amount, plus interest, over a set period of time.

When it comes to the interest, you are paid at a fixed rate and predetermined schedule. This interest rate is commonly referred to as the coupon. The face value is the amount that is being borrowed, and the maturity date is the day on which the amount has to be repaid.

Bonds are a relatively safe investment, as the issuer is legally obligated to repay the principal amount and interest. However, bonds do carry some risks, as the issuer may default on their payments. There are many different types of bonds available, each with its own set of features and risks. Here are some of the most common types of bonds:

Government Bonds

Government bonds are issued by the Government of India. They are the safest type of bond, as the government has a strong track record of repaying its debts. Government bonds typically offer lower interest rates than other types of bonds, but they are also less risky.

Also Read: Sweep-In FD Vs Liquid Fund: What’s your best option?

Sovereign Gold Bond (SGB)

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. These bonds are issued by the Reserve Bank on behalf of Government of India. Investors are assured of the market value of gold at the time of maturity and interest. SGB is free from issues like making charges and purity what we often see in carrying physical gold in jewellery form.

State Government Bonds

State government bonds are issued by the state governments. They are similar to government bonds, but they carry a slightly higher risk, as the state governments may not be as financially strong as the Central government.

Corporate Bonds

Corporate bonds are issued by companies. They carry a higher risk than government or state government bonds, as the company may default on its payments. However, corporate bonds also offer the potential for higher returns. Chance of default is almost negligible when you opt for a reputed company bond.

Municipal Bonds

Municipal bonds are issued by local governments. They are similar to corporate bonds, but they carry a slightly lower risk, as local governments are less likely to default on their payments.

Tax-free Bonds

Tax-free bonds are a type of bond that is exempt from income tax. This makes them an attractive option for investors who are looking to save on taxes. These bonds are beneficial for senior citizens or those individuals who wish to save tax and earn fixed income in the long run.

Adhil Shetty, CEO, Bankbazaar.com, says, “When you invest in bonds, you need to consider your investment goals, risk tolerance, and time horizon. If you are looking for a safe investment with low returns, then government bonds may be a good option for you. If you are looking for a higher return, then corporate bonds or municipal bonds may be a better choice.”

You need to be prepared to take on more risk with these types of bonds. It is important to do your research before investing in bonds. You should read the bond prospectus carefully and understand the risks involved. You should also compare the different types of bonds available to find the ones that are right for you.

Here are some additional things to keep in mind when investing in bonds in India:

Interest rates

The interest rates on bonds are determined by several factors, including the creditworthiness of the issuer, the demand for bonds, and the prevailing interest rates. When interest rates rise, the prices of bonds fall. This is because investors are willing to pay less for a bond that offers a lower interest rate.

Maturity period

Bonds have a maturity period, which is the length of time before the issuer is required to repay the principal amount. The maturity period of a bond can range from a few years to 30 years or more. Longer maturity bonds offer the potential for higher returns, but they may carry risk as well.

Liquidity

Bonds are relatively liquid investments, which means that they can be easily bought and sold. However, some types of bonds, such as corporate bonds, may be less liquid than government bonds. This means that it may be more difficult to sell them quickly if you need to.

Bonds can be a good investment for a variety of investors. However, it is important to understand the risks involved and to choose the right types of bonds for your individual needs.