Here is How One can Invest in Government Bonds

Shalmoli Sarkar — Tue, 19 Oct 2021 11:35:40 +0000

Government bonds, also known as government securities, are debt instruments that are issued by the central or state government to collect funds from the public at regular intervals at an agreed rate of interest to finance their various projects. The money raised from the issued securities is utilised in spending on new projects such as infrastructure, flyover, roads, schools, water canals, etc.

Investing in government bonds is considered one of the most preferred low-risk investment options for investors. It creates a well-diversified portfolio and cushions the risk of the overall portfolio.

Investment in government bonds can happen in various ways. Below are some of the methods by which we can invest in government bonds

5 Ways to invest in government bonds

Gilt funds

Gilt funds are a type of debt mutual fund that invests only in government bonds issued by the RBI on their behalf. These debt securities are being issued from both state and central government and are heavily invested by institutional investors. It is also a retail investor-friendly investment option. Investing in the Gilt fund has no credit risk since the chances of the government going out of business are nil, thereby safeguarding the capital. Gilt funds generate good returns as well and anticipate interest rate movement in the market. An investor is taxed on a short-term capital gain basis and can be held for less than 36 months. If the funds are held for more than 3 yrs then the investor is liable to pay 20%.

Sovereign gold bonds

Investors can invest in gold at a minimum price with a guarantee of safety from the government. The sovereign gold bonds go in a lock-in period of 8 years and have the option to redeem the same from the 5th year into the investment. It carries an interest rate of 2.5 % per annum. Investors can start investing from as low as 1 g to 4kg of gold. These bonds can be used as security while applying for loans.

Conservative mutual funds

These are mutual funds that require an investor to invest in securities issued by a state or central government along with other debt, money market instruments, and equity and equity-related securities. The feature of low risk makes conservative mutual funds to be an ideal option for low-risk appetite investors. Its taxation resembles the gilt mutual funds.

Conservative mutual funds predominantly invest in securities that are state or central.

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Government bonds are debt instruments that are issued by the central or state government to collect funds from the public at regular intervals at an agreed rate of interest to finance their various projects.

Liquid funds

Investors can invest in liquid funds which is another category of debt mutual funds. The funds collected in the mutual funds are invested in government securities like treasury bills that have a maturity of 91 days. The biggest benefit of investing in this mutual fund is that it does not have any lock-in period and an investor can withdraw any amount without any charges of entry or exit loads. They offer returns between 7% to 9%.

NSE goBID (Government Bond Investment Destination)

This investment option is available to the resident investor. Resident investor for India is that individual who has spent 182 days or more of the financial year in India or stayed in 60 days or more in the year and for 365 days or more in the 4 years preceding the relevant financial year. The investor can directly log in to NSE goBID’s website or mobile application and can invest in government bonds of their choice by bidding for the same.

Advice for the investors

Government bonds or securities were considered an investment option suitable for banks, financial institutions, and corporate, but now they are opening up for retail investors as well. Its features being a risk-proof investment, delivering good long-term returns, high liquidity, and making the portfolio diversified makes it to be an ideal investment plan for retail investors.

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Bonds vs Debentures : The Essentials of Investment Instruments to be Known By Every Investor

Shalmoli Sarkar — Sat, 25 Sep 2021 03:35:08 +0000

Companies can finance themselves in two ways. One is through equity financing, where the company dilutes a part of its shares for retail investors for collecting funds and in return promising ownership in the company and a fraction of profits. The second way is through debt financing where companies take loans from banks or the public in the form of bonds or debentures. Bonds and debentures, although similar, are still different and create confusion among the investors. Let us deep dive a little to know more about how bonds and debentures differ from each other.

What are bonds?

Companies require money for financing several projects for expansion, acquisition, or strengthening research and development for which they seek loans from the public. Bonds are investment securities where an investor lends money to a private company or a government firm for a fixed time period in exchange of regular interest payments. The interest payment from the firm can be either cumulative or annual.

After the bond reaches its maturity period, or the time promised, the company or bond issuer returns the investor’s money. A bond is also secured with collateral. This means that in case a company wraps up, it will liquidate its assets to pay money to its bond investors. Fixed income is also a term used to describe bonds since the investment earns fixed payments over the life of the bond.

What are debentures?

Similar to bonds, but a little different, debentures are unsecured investment instruments that are not backed by any collateral. Not secured by collateral means, if a company shuts down investors will not be able to recover the money they invested. Since there is no collateral involved the interest rates offered are also high in debentures. Corporations collect funds through debentures when there is a financial crunch or there is a plan to expand their business with a new project.

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Debentures vs Bonds - has always remained a dilemma for investors. Although, the investment instruments are similar but investors should know the thin line between the two.

Debentures vs Bonds – The difference

Apart from collateral, there are several other parameters that differentiates the two from each other.

Types of debentures

Depending on financial goals and objectives, a company can issue various types of debentures.

Convertible debenture:
The debentures can be converted into equity shares after a pre-decided time and pre-decided price. All this information is mentioned in the debenture certificate. After converting the debenture, the investor will be receiving the dividend and share price growth given by the company along with the fixed interest.
Non-convertible debentures:
These debentures cannot be converted into equity shares.
Registered debenture:
The debenture is issued in the name of an individual and can be only transferred by a transfer deed. The interest is paid only to the individual whose name is mentioned in the debenture certificate.
Bearer debentures:
The debenture certificate does not have the name of any individual and is transferable by delivery. Whoever has this debenture is eligible for receiving interest.
Redeemable debentures:
In this type, the date on which the investors will get their invested money is mentioned on the company’s debenture certificate. On the said date, the company will have to return the principal amount to the debenture holder.
Irredeemable debenture:
It has no such specific date mentioned which makes the debenture continue for infinity. There is no fixed date for paying the debenture holder. It is redeemable only when the company goes into liquidation.

The dilemma of an investor – Debentures vs Bonds

It depends on the risk appetite of the investor. To some investors, debentures can be attractive as it offers high-interest rates. An investor in this investment plan puts money based on the face value or trusting the issuer company’s strong reputation. But, here the investor should ascertain the quality of the issuer by checking the credit rating of issuers. Credit agencies give opinions about the creditworthiness of issuers with grades as AAA, AA, etc.

Investing in bonds, on the other hand, is simpler and has low risks due to collateral as there is a defined maturity with fixed returns where the bond issuer commits to pay back the invested amount on a specified date.

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