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Types of Bonds to Invest in Financial Markets


Are you new to the Indian stock market and feel lost at the mere mention of financial terms such as shares, debts, stocks, bonds, equities, etc.? To begin with, you need to know the different types of investments. There are basically three different types of investments:

1. Short term investments: These types of investments are made for a couple of weeks to a couple of months. They are made based on breaking news or on charts of technical analysis.

2. Mid-term investments: These types of investments are made for a couple of months which may even last for a couple of years. They are made based on the analysis of quarterly financial results or fundamental analysis.

3. Long term investment: These types of investments are made for longer periods of time reflecting for a couple of years; for eg 3-5-10 years, etc. They are made after thoroughly analyzing the fundamentals of the company and its prospects of future growth. These types of investments are generally free from the daily volatility (up-and-down) of markets and their share price.

There are many different ways to invest money; which are different from each other, depending on their risk factor and the amount of returns that they provide. The common ways by which you can invest your money include:
• Bonds
• Debentures
• Stocks
• Mutual Funds
• Futures
• Gold
• Real Estate
• Forex

There is a lot of uncertainty in today's times, especially in investments. Bonds are generally considered good investment options for investors as they are short-term and less risky, as compared to equities.

They are a means of investment money by lending money to others. They are debt instruments that are issued by governments, corporations and other entities in order to finance projects or activities. It is a loan that investors make to the bond's issuer.
Debentures are also debt instruments which guarantee to repay the principal of the loan together with interest to the bondholder. It is a document that creates debt or acknowledges it. Often a term interchangeably used with bond, debts are like certificates of loan.

The price of one when it is first issued is usually the amount of money that is being loaned and is referred to as the bond's face value. In exchange of this loan the investor receives interest known as the bond's coupon. They are issued for a specified period of time such as 1 year, 3 years or even 30 years. When the end of this time period is reached the issuer has to repay the loan to the investor.

For eg, if you want to expand your company and increase the number of shops; you could issue bonds to the public instead of going directly to the bank. Suppose Rahul buys them at their face value- INR 1000 at 8% interest rate (coupon) with a maturity of 10 years. Rahul will get 8% of INR 1000 over a period of 10 years, ie INR 80 per month. (8% of INR 1000)

At the time of maturity, at the end of 10 years, you could return the INR 1000 investment. Rahul could also sell his them before the time of maturity.
Corporations often issue them to fund capital projects, while Governments issue them for public projects.

When you buy one, the bond which you buy will show the amount of money that is being borrowed (face value), the interest rate (coupon rate or yield) that the borrower has to pay over the lease, the interest payments (coupon payments ) as well as the deadline for paying the money back to the company.

For example, suppose you want to start your own stationary shop and require a certain amount of capital to get started. You acquire the requisite funds from a friend and write down a receipt of this loan. You have just bought a bond (IOU) by borrowing money from your friend who is the issuer of the same.

There are different types of bonds that are available in the Indian stock market. Some of them include:

1. Corporate Bonds: These types of bonds are issued by corporations in order to raise capital. They are usually offered by private corporations in India for terms that may even last up to 15 years. There is a higher amount of risk here as it is dependent on the corporation backing the bond, the country's industry, market conditions and its investment rafting. However, there is a higher return on this type of investment. They may either be convertible or non-convertible.

2. Government Bonds ('Public Sector Undertaking bond'): These are issued directly by the Government or by the Public Sector Units (PSU's) in India. These are usually backed with security from the Government. They are generally offered at lower rates of interest as compared to other types of bonds.

3. Banks & other financial institutional bonds: These are issued by financial institutions and banks in India. Large scale investors are the most important investors in this category.

4. Tax Saving Bonds: These are issued by the Indian government and allow citizens to be either partially or fully released from paying taxes. Most of them are issued by India's Reserve Bank and are usually five year bonds where the interest is paid off every half year.

5. Emerging Market Bonds: These are issued by the Indian government and are issued as hard currency to help raise capital for economic development in third-world countries. They are issued in either ES dollars or the Euro- making them attractive to investors. The success of these bonds is tied to the success of the country's economic development.

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Source by Neha Kapur

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