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How to Invest in Bonds in India?

Over the years, bonds have become a preferred option for risk-averse investors looking to reduce the impact of equity market volatility on their portfolios. 

If you are also looking to include this fixed-income instrument in your portfolio, this article will help you to understand how to invest in bonds in India, starting with a quick refresher on the inner workings of the asset. 

Understanding Bonds

Bonds are fixed-income securities that can be issued by the government and corporate entities to raise capital for different goals. 

Bonds promise fixed returns to investors at the interest rate specified in the contract. The interest paid to bondholders is also known as a ‘coupon’. 

As per the bond terms, the interest must be paid along with the principal either monthly, half-yearly, or annual basis.

The coupon rate for bonds is fixed based on the credit rating from independent agencies. 

Depending on the issuer and purpose, bonds can be categorized into various types, such as:

  • Government bonds
  • Corporate bonds
  • Infrastructure bonds
  • Convertible bonds
  • Municipal bonds
  • Sovereign Gold Bonds (SGBs)
  • Zero-coupon bonds

Bonds with a maturity period of less than 5 years are short-term bonds. Medium-term bonds have a tenure between 5 to 12 years and long-term bonds have a term of over 12 years. 

There’s more. Certain categories of bonds like infrastructure bonds and tax-free bonds offer tax benefits on interest income. 

Where to Buy Bonds in India?

There are two bond markets in India from where you can buy bonds. Each market has its own characteristics that we’ll discuss in the following section.  

Primary Bond Market

Also known as the issue market where you can apply to the issuer directly, who will allocate the bonds as per specified terms and conditions. 

In this market, bonds are generally sold through private placements or public offerings (Bond IPO). 

Private placements involve offering bonds to a select group of institutional investors. In the case of public offerings, bonds are sold to the general public through underwriters.

Secondary Bond Market

Also known as the after-issue market, this is the place where you invest in bonds acquired from other investors. There is no need to fill out any forms or wait for allocation. 

You will receive the bonds in your demat account online after the transaction has been settled by the exchange.

Steps to Invest in Bonds in India

Now that you know where to buy bonds in India, it is time to learn the steps to invest in bonds through different channels.

Buying Bonds Through a Broker

1. Choose a registered stockbroker like Dhan that offers bond investment services and open a trading account.

2. Now, you need to do thorough research about different bonds available in the market. Consider factors such as maturity periods, coupon rates, credit ratings, and risk levels.

3. After your trading account is activated and you have selected the bonds after doing fundamental or technical analysis, place orders through your broker. 

4. The bonds will be credited to your demat account after the settlement process has been completed. 

Buying Bonds Through RBI Retail Direct

1. Log on to the Reserve Bank of India (RBI) Retail Direct Portal through the official RBI website. 

2. Complete the registration process on the RBI Retail Direct portal by providing the necessary documents and details.

3. Check out the available bonds and determine their suitability for your portfolio. You must follow all steps specified on the portal to invest in bonds of your choice.

4. You can monitor the status of the application and allocation process through this portal. 

5. After the bonds have been allocated, you must monitor their performance regularly and make changes to your strategy as required.

Apart from these two options, you can also invest in bonds indirectly through different Bond Exchange Traded Funds (ETFs) and various types of mutual funds available in the market. 

Pros and Cons of Investing in Bonds

Here are the pros and cons of bonds as an investment option to help you make an informed decision: 

Pros

  • Lower Investment Risk: Bonds carry lower investment risks and, thus, offer the benefit of diversification for your portfolio. 
  • Lower Volatility: Bonds are suitable for risk-averse investors as they exhibit lower price volatility.
  • Multiple Options: There are multiple types of bonds to choose from according to your preferences.

Cons

  • Effect of Inflation: Due to inflationary forces, the real value of returns from bonds can erode.
  • Liquidity Issues: Some bonds may suffer from limited liquidity in the secondary market, making it difficult to sell them quickly.
  • Lower Returns: Bonds can potentially offer lower returns compared to other investment options such as equity.

Conclusion

Having a balanced portfolio is essential for investors to hedge against equity market volatility. This is where bonds emerge as a good option as they offer fixed returns with lesser risk. 

Once you learn how to invest in bonds in India, you can make informed decisions about including them in your investment portfolio. 

If you are looking for different options to invest your money, then you can consider Dhan as your investment platform. It offers you the option to invest in stocks, F&O, currencies, commodities, ETFs, and IPOs. 

FAQs

Q. Are bonds a good investment in India?

Whether or not bonds can be a good investment will depend on the creditworthiness of the issuer as well as the terms of the bond. 

Q. Can I invest 1000 rs in bonds?

Yes, you can invest Rs. 1000 in bonds as it is often considered to be the minimum amount for bond investing.   

Q. Can I buy bonds directly in India?

You can buy bonds from a registered broker like Dhan or from RBI. 

Shriram Shekhar

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