Bonds are issued by different institutions for different reasons. What’s important for you to know and consider is the reliability and trust you have on the bond issuing company to return your money. Also, another important factor to consider is the reason for your investment. Are you investing to earn some tax-free income or are you in need of regular fixed-income? Maybe you’re investing to build a more diversified investment portfolio. Whatever the reason may be, having a better understanding of the different types of bonds in the market will help with your decision-making, so that you choose an investment option to matches your financial needs.
Here are some insights into the different types of Bonds in the Market:
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1. Government Bonds
Government bonds are issued by the national government and are also known as ‘sovereign debt’. What this means is that these bonds will be repaid using the taxes collected from the people. These types of bonds are considered to be the safest and a risk-free investment option if it’s issued in a stable country with a growing economy. A risk-free investment option with no tax deduction at source, government bonds are a lucrative investment option for individuals with low-risk appetite, looking for stable returns. Earlier, investments in Government bonds was possible only through banks and post offices, however, now retail investors can buy these bonds using their Demat accounts.
2. Municipal Bonds
Municipal Bonds are issued by local or state level governments or other agencies of the government like the transportation department, healthcare department in order to fund government activities. Credit rating agency – SEBI has instructed that all municipal bonds should have a rating above investment grade for public issue. Moreover, municipal bonds should have a minimum maturity period of 3 years. Like government bonds, municipal bonds are one of the safest investment options, as it is backed by the government’s ability to repay the amount invested. The other advantage is that all municipal bonds fall under the tax – free segment of investment.
3. Public Sector Bonds
Public Sector Bonds are bonds issued by organizations within which the government holds more than 50% ownership. These bonds are usually medium to long-term bonds with maturity periods ranging from 5 years upwards. Some PSU bonds also come under the tax-free investment category. PSU bonds are implicitly guaranteed by the government, bringing in a greater sense of stability. However, it is up to the investor to do their research and background check to verify the reliability of the issuing company.
4. Corporate Bonds
Large corporations and financial institutions take up a large portion of the corporate bond market. Depending on the maturity period, Corporate Bonds can be classified as short-term, intermediary or long-term which goes up to 12 years. The biggest difference between government bonds and corporate bonds is the higher yield rate. Corporate bonds don’t enjoy the stable status of the government and hence have a higher risk percentage. However, Corporate Bonds will provide a good rate of fixed returns. Most corporates with good credit ratings and reputation in the market are less likely to default, and hence investing in them will be a good bet for those who do their research and background check.
5. High-yield Bonds
High –yield bonds are bonds issued by organizations that are new entrants in the market or those who haven’t built a strong reputation yet. These bonds have a lower credit rating than corporate bonds and offer a higher yield rate. For high-risk appetite investors, these bonds are opportunities that they leverage to make quick gains. Investors should understand the risk factors involved in this category before making an investment.
Want to learn more about the relationship between bond prices and yields. Check out our detailed guide how bond price impact yield.
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GoldenPi is an online infrastructure provider for bonds. The contractual obligations are between the buyer and the seller (Bond Institutions) on the platform via the ‘Deal sheet.’ As per SEBI guidelines, the purchase happens via ICCL’s RBI account, eliminating counterparty risk.
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