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Why Bonds are the safest investment options right now

Central banks worldwide hiked bank rates multiple times in 2022 amid concerns surrounding an impending economic slowdown. Additionally, the cost of living everywhere has been continuously rising, while unemployment rates have been worryingly high since the start of the covid-19 pandemic. With most financial firms cutting their growth forecasts, you must prepare for an economic downturn in the coming months.

It is essential to point out that continuing to invest in profit-making assets despite the economic risks involved is essential. For that, you need an investment plan. For most of us, the goal is to invest smart and retire early.

Investing in the bond market should be the obvious choice. It is the safest investment if you want to protect your wealth or earn a decent return without taking too much risk. There are two ways to profit through the bond market. One is to hold the bond till its maturity and profit from the interest earned. The other is through the secondary market, where existing bonds are bought and sold at a discount or a premium to their original value. You make money in capital gains.

What are Bonds? 

A bond is a type of investment where you lend money to a government, company, or organization for a fixed period. In return, the issuer pays you regular interest, known as the coupon, and returns your original amount when the bond matures. Bonds are considered safer than stocks because they offer steady income and have a set maturity date. They come in different types, with varying risks and durations. Bonds are a popular choice for investors who want predictable returns and to balance their investment portfolio with less risk.

Types of Bonds in India for Different Investment Goals

Bonds come in various types, each designed to meet different investment needs and risk profiles. Here’s a quick overview of the most common types:

  • Government Bonds: Issued by central or state governments, these are considered the safest bonds with low risk and steady returns. Examples include treasury bonds and state development loans.
  • Corporate Bonds: Issued by companies to raise capital, these carry higher risk than government bonds but offer better yields. They are rated based on the issuer’s creditworthiness.
  • Municipal Bonds: Issued by local governments or municipalities to fund public projects. These often come with tax benefits and are popular among investors seeking tax-efficient income.
  • Fixed-Rate Bonds: These bonds pay a fixed interest rate throughout their tenure, providing predictable income.
  • Floating-Rate Bonds: Interest rates on these bonds fluctuate periodically based on market benchmarks, offering protection against rising interest rates.
  • Zero-Coupon Bonds: Sold at a discount, these bonds do not pay periodic interest but provide a lump sum at maturity.
  • Convertible Bonds: These can be converted into a predetermined number of shares of the issuing company, combining features of debt and equity.

Understanding these types helps investors choose bonds that align with their financial goals and risk tolerance.

Top 5 Risks of Investing in Bonds Every Investor Should Know

When investing in bonds, it’s important to understand the five key risks involved:

  1. Interest Rate Risk: Bond prices fall when interest rates rise, which can reduce the market value of your bond if you sell before maturity.

  2. Credit Risk: This is the chance that the bond issuer may default on interest or principal payments. Government bonds have very low credit risk, while corporate bonds carry higher risk.

  3. Reinvestment Risk: When you receive coupon payments or principal back, you might have to reinvest at lower interest rates, reducing overall returns.

  4. Inflation Risk: Rising inflation can erode the real value of fixed interest payments, decreasing your purchasing power.

  5. Liquidity Risk: Due to low market activity, some bonds, especially those from smaller issuers, may be difficult to sell quickly or at a fair price.

Knowing these risks helps you choose bonds wisely and manage your portfolio effectively.

Additional Read - 5 Types of Risks in Bond Investments

When Should You Be Concerned About Bond Investment Risks

The element of risk appears only when you trade in the secondary bond market. Your best weapon to deal with that risk is to understand the yield curve. Interest rates generally trend down in a high-growth economy.

For example, the bond price will decrease when the interest rate increases. At the same time, the reinvested yield of coupons for the bond will increase, and vice versa. Therefore, an effective strategy requires that these two opposite effects cancel each other out, guaranteeing that the asset's future value will not be affected by the fluctuations in the market.

Moreover, bonds should appeal to those who trade in the Indian market. There is great potential in India's debt market, which is valued at around $2.1 trillion. India's bond market even trumps its stock market.  About $1.6 trillion is made up of government bonds, with a good chunk composed of issuances by various Indian states (State Development Loans or SDLs) and other agencies.

Whether your goal as an investor is to make more money without increasing your initial investment or to protect your investment from any potential market risks, having a diversified portfolio is crucial. Balancing your portfolio with a good mix can protect your investment in the long run. Using smart bond investing strategies like the immunisation strategy can add the necessary edge.  

Bonds are helpful for those with surplus funds looking to generate a regular income. You can create a 'tap of money' flowing into their account every six months. Many high-net-worth individuals and companies with surplus cash rely on that plan. The idea is to never run out of cash. At the same time, it ensures wealth protection.

Frequently Asked Questions (FAQs)

1. Is an investment bond a good idea?

Yes, investment bonds are a good idea if you seek stable income, capital protection, and low-risk investment options. They are ideal for conservative investors and those looking to diversify their portfolio with fixed-income instruments like government or PSU bonds.

2. How to buy bonds in India?

You can buy bonds in India through several channels:

  1. Stock Exchanges (NSE, BSE): Requires a Demat and trading account.

  2. Online Trading Platforms: Most brokers offer bond investments on their apps.

  3. Direct RBI Portal: For government bonds like G-Secs and SDLs.

  4. Public Issues: Subscribe to corporate or PSU bonds during public offerings or auctions.

This makes bond buying accessible to both retail and institutional investors.

3. What are the 4 types of bonds you can invest in?

The four main types of bonds you can invest in India are:

  • Government Bonds – Issued by the central or state government; low risk.
  • Corporate Bonds – Issued by private companies; higher yields, higher risk.
  • Municipal Bonds – Issued by local bodies; may offer tax benefits.
  • PSU Bonds – Issued by Public Sector Undertakings; backed by the government.

Each bond type suits different investment goals, from safety to returns.

4. What is the return on bonds in India?

In India, bond returns typically range between 5% and 8% per annum, depending on the type of bond, issuer rating, and tenure.

  • Government bonds offer stable returns of around 6–7%, with minimal risk.
  • Corporate bonds can yield 7–9%, depending on credit rating.
  • Tax-free bonds (e.g., from PSUs) offer lower yields but come with tax exemptions.
  • Inflation-indexed bonds adjust returns based on the inflation rate.