What are Bonds: How They Work and How To Invest?

Consider a company planning to expand its business, like a manufacturing firm building a new plant. It needs a large sum of money, but doesn’t want to dilute ownership by issuing more shares. Instead, it borrows money from investors through bonds. 

A bond is essentially a loan made by investors to the company or government. Each bond has a face value (the amount borrowed), a coupon rate (the fixed interest paid periodically), and a maturity date (when the borrowed amount will be repaid).

Understanding what bonds are and how bonds work can help you diversify your investments and earn a steady income. Let’s explore the basics of bond investing and how you can participate in this market confidently.

What Are Bonds? 

When businesses or governments need funds beyond their immediate cash flow or bank loans, they turn to the bond market in India or globally. A bond is like an IOU, a promise to repay money borrowed along with interest, at a set time. If a government wants to build infrastructure or a company wants to invest in new machinery, instead of going to banks alone, they issue bonds to many small and big investors. Each investor lends a part of the required amount and collectively finances the project.

A bond is a debt security representing a loan made by an investor to a borrower, such as a corporation or government entity. It includes terms for the repayment of principal and periodic interest payments.

Think of a bond like a business issuing a formal invoice to a crowd of investors, promising steady interest payments until it pays back the entire principal at maturity.

How Do Bonds Work?

Imagine a cement company issuing bonds worth ₹10,000 each with an 8% coupon rate and a maturity of 5 years. If you buy one bond, you lend the company ₹10,000. Each year, it pays you 8% of ₹10,000, which equals ₹800 as interest. This is your fixed income, similar to rent from a property, but without being a landlord.

At the maturity date, the company repays the ₹10,000 principal to you. You get a regular income and your original investment back, unless the company faces financial trouble.

This bond’s fixed coupon payments are attractive to investors who want stable returns, especially compared to stocks that fluctuate widely. The bond’s price can vary on the open market depending on the bond's interest rates and creditworthiness. Still, if you hold it until maturity, you generally get your principal back plus interest, making bonds a reliable choice.

Key Bond Terms You Should Know

• Face Value: The amount the bond will be redeemed for at maturity, typically ₹10,000 in most retail bonds.
• Coupon Rate: The fixed annual interest rate the issuer promises to pay.
• Maturity Date: When the bond issuer repays the face value to the bondholder.
• Yield: The effective return you earn, which may differ from the coupon rate if you buy the bond above or below face value.

By understanding these elements, investors can compare bonds effectively and decide which suits their financial goals.

Why Invest in Bonds?

Suppose you have a fixed income or want a safer investment than stocks. Bonds offer fixed returns, often higher than savings accounts or fixed deposits. They reduce portfolio risk by providing steady cash flow through coupon payments and principal repayment.

For example, government securities or corporate bonds rated highly are considered safer, with predictable cash flows. Compared to owning a business directly, bonds involve less risk because the issuer’s obligation is contractual and prioritised over equity dividends.

Bonds also play a key role in diversifying your investments and balancing the ups and downs of the stock market.

Understanding Bond Interest Rates

Interest rates in bonds move with the market. For instance, if the Reserve Bank of India raises rates, new bonds may offer higher coupons. Existing bonds paying lower coupons may sell at a discount on exchanges.

The bond market in India has evolved, with more accessibility for retail investors. Bond’s interest rates vary by issuer’s credit rating, tenure, and economic conditions.

Investors pay attention to bond interest rates because they determine income and impact the bond’s price. Higher rates usually mean lower prices for existing bonds, and vice versa. Your goal is to find the right balance based on your risk tolerance and investment horizon.

Investing in Bonds: Scenario-Based Approach

Suppose you own a shop in a busy market with steady customers. Bonds are like renting out part of that shop to someone who pays you fixed rent over years, regular, predictable income with less hassle than selling the shop. Similarly, bonds provide steady interest income and final repayment while keeping your capital intact.

To begin investing in bonds, you can now use Bondbazaar, which simplifies this process. Bondbazaar offers a wide selection of over 10,000 bonds, including government securities and corporate bonds. It’s a SEBI-regulated platform combining automated digital tools with physical service support, ensuring trust and transparency for investors.

How to Invest in Bonds through Bondbazaar?

1. Create an Account: Sign up on Bondbazaar without any charges, no account opening, brokerage, or maintenance fees.
2. Complete KYC: Submit your KYC documents digitally for smooth verification.
3. Link Your Demat and Bank Account: Bonds are held in demat form, and all interest and principal payments are credited directly to your bank account.
4. Browse and Select Bonds: Choose from government bonds, corporate bonds, and other categories based on your investment goals.
5. Place an Order: Buy bonds with a few clicks on a real-time trading platform.
6. Monitor and Sell Anytime: You can also sell bonds easily on the platform anytime you want, providing liquidity and flexibility.

Bondbazaar’s offering of 8-14% fixed returns with zero extra charges makes it attractive for investors seeking dependable income. The platform’s user-friendly interface, combined with expert backing and regulatory compliance, ensures a safe investment environment.

Conclusion

Bonds can be a powerful addition to your investment portfolio, offering fixed, predictable income and capital preservation. Understanding what bonds are and how bonds work helps you make informed decisions in the growing bond market in India.

With Bondbazaar facilitating easy buying and selling of bonds across multiple categories, investing becomes simpler and accessible to individual investors. Consider exploring bond investments to diversify, reduce risk, and benefit from steady interest earnings.

Start your journey into bond investing today and unlock the benefits of fixed returns with the convenience of Bondbazaar.

Ready to invest in bonds with ease and confidence? Create your account on Bondbazaar now and explore a world of fixed-income opportunities, simple, transparent, and without hidden fees.

Frequently Asked Questions

1. Who can issue bonds in India?

Bonds can be issued by the Government of India (G-Secs), state governments, public sector enterprises, banks, and private corporations to raise capital.

2. Are bonds risk-free investments?

Government bonds are considered the safest as they are backed by the government. Corporate bonds carry some credit risk depending on the issuer’s financial health, but secured and highly rated bonds are generally safer.

3. What is the minimum investment in bonds?

You can start investing in bonds with as little as ₹1,000 on platforms like Bondbazaar, making them accessible to retail investors.

4. How are bonds different from stocks?

• Bonds: Debt instruments, offer fixed interest and principal repayment.
• Stocks: Equity instruments, returns depend on company performance and dividends.

5. Can I sell my bonds before maturity?

Yes. Many bonds can be traded on platforms like Bondbazaar, allowing you to sell them before maturity depending on market demand and liquidity.

6. How are bond interest rates determined?

Bond rates depend on the issuer’s credit rating, market interest rates, and the tenure of the bond. Higher risk issuers usually offer higher interest to attract investors.

7. Do I need a demat account to invest in bonds?

Yes, most bonds are held in demat form, and all interest and principal payments are credited directly to your linked bank account.

8. Are bond returns taxable?

Yes. Interest income from bonds is taxable as per your income tax slab, unless it’s from a tax-free bond which is exempt under certain conditions.