Bonds are a type of investment where you lend money to a borrower, such as a company or a government, for a fixed period of time. In return, you receive regular interest payments and get your money back at the end of the period. Bonds are considered a fixed-income security because they pay a fixed rate of interest, also called the coupon rate. However, the market value of bonds can change depending on the interest rates and the credit quality of the issuer. Bonds are generally seen as a safe and stable investment, but they also have some risks, such as default risk, inflation risk, and interest rate risk.

What are the different types of bonds?

Government bonds: These are issued by the central or state governments to finance their budget deficits or development projects. They have low risk and low interest rates. They are also called G-Secs, SDLs, or state guaranteed bonds.

Corporate bonds: These are issued by private companies to raise capital for their operations or expansions. They have higher risk and higher interest rates than government bonds. They are also called NCDs or non-convertible debentures.

Convertible bonds: These are a special type of corporate bonds that can be converted into a fixed number of shares of the issuing company at a predetermined price. They offer both the features of debt and equity, but not at the same time.

Sovereign gold bonds: These are bonds issued by the RBI on behalf of the government that are linked to the price of gold. They offer a fixed interest rate and a redemption value based on the prevailing gold price. They are also a way of investing in gold without holding physical gold

AVERAGE RETURN

The average return in bonds in India depends on the type, duration, and issuer of the bonds, as well as the market conditions and interest rates. According to one source, the historical average return of a bond portfolio in India is around 5.42% (individually it’s 9%-12%).

why we should consider investing in bonds

Diversification: Bonds are a great option to diversify your portfolio, especially if you have a high-risk exposure to equities or other instruments. Bonds can reduce the overall volatility and risk of your portfolio, as they tend to have a low or negative correlation with stocks.

Predictable cash flows: Bonds provide returns in the form of interest payouts, which ensure regular income and help in planning expenses and savings.

Lower risk: Bonds are generally considered a safer investment than stocks, as they have a lower probability of default and a higher priority of repayment in case of bankruptcy. Bonds issued by the government or its agencies are backed by the sovereign guarantee, which makes them virtually risk-free.

Minimum investment for bonds

The minimum investment for bonds in India depends on the type and issuer of the bond. Generally, the minimum investment is around Rs. 1,000 to Rs. 10,000.

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