How To Buy Bonds In India?

For fixed-income earners, bonds can be a prudent investment option. When you invest in bonds, you are basically lending money to the institution issuing the bond. In return, you get an interest. Bonds may include government securities, treasury bills and corporate bonds, among others. In a highly volatile market, bonds can be a good investment option to hedge your portfolio.

Why Invest in Bonds? 

Investing in bonds is a prudent way to diversify your fixed-income portfolio. The interest received from bonds can supplement your primary income. If you have a low-risk tolerance, which means you don’t want to take too much risk on your investments, bonds can be a good choice for you. The income from bonds is easily predictable, and it also preserves your capital.

Government and corporate houses raise capital through which they finance various ongoing projects and issue bonds. As they are fixed-income products, they carry lower risk than equities and give your portfolio a good balance.

How To Buy Corporate Bonds in India? 

As the name suggests, corporate bonds are issued by corporations to investors to raise capital. A corporate bond is first issued in the primary market and then traded in the secondary market from where you can purchase it. Demand and supply, current interest rates and liquidity are some major factors determining the bond’s value and yield. 

There are two types of corporate bonds: 

• Based on maturity
• Based on coupon 

While perpetual bonds, long-term bonds and short-term bonds are based on maturity, those based on coupons include zero-coupon bonds and fixed-rate bonds. Before investing in a corporate bond, research on the company and its fundamentals. See its financials, and it is in your interest to invest in the bond of the company that is financially sound and established. If you want to invest in corporate bonds, you need to have a Demat account where the bonds purchased get deposited after purchase. 

How To Buy Municipal Bonds in India? 

The concept of municipal bonds is not new in the country. The Bangalore Municipal Corporation was the first entity to issue municipal bonds. The Securities and Exchange Board of India (SEBI) in 2015 issued regulations for issuing municipal bonds. These bonds are traded in the primary and secondary market and you can buy them through brokerage firms, banks, and bond dealers.  

For buying municipal bonds from the primary market, you need to follow the retail order period process. However, it is prudent to go for it only if you are willing to invest a large amount as in the primary market bonds are released in high denominations. To buy bonds from the secondary market, you need to have a Demat account. Post this, you can go ahead and buy bonds from brokerage firms, banks, or bond dealers.

How To Buy Government Bonds in India? 

The Government, too from time to time, issues bonds to the public to raise capital. Some ways to buy Government bonds in India are:

• Gilt Mutual Funds 

Gilt mutual funds can be a convenient option if you want to invest in government bonds. These funds are a category of debt mutual funds that solely invest in bonds and fixed-income securities. It is essential to note gilt funds are slightly different from bond funds which may invest in corporate bonds. Gilt mutual funds entirely invest in government securities. However, there are a few things you must consider before investing in gilt mutual funds.  

Expense ratio is one of the foremost things you need to consider while investing in gilt mutual funds. A high ratio can eat your returns, and hence, it is vital to opt for a fund offering a competitive ratio. Investment horizon is another essential consideration before investing. Generally, the portfolio of gilt funds matures within three to five years. Hence, you need to have a similar investment horizon to make the most out of your investment.

• Direct Investment

Direct investment is another option to buy government bonds. All you need to do is have a demat account and a trading account with a brokerage house. Once you have them, you can buy and sell bonds as per your choice.  

• RBI Retail Direct

RBI Retail Direct, launched last year in November, provides another opportunity for investors to invest in bonds. If you are looking forward to investing directly in government bonds, RBI Retail Direct can help facilitate the same. If you wish to invest, you need to have a direct gilt account. To open an account:

● Visit RBI Retail Direct website

● Keep the following documents handy: PAN card, bank account details, email and a valid mobile number

● Once you have these things ready, click “Open RBI Retail Direct Account”

● Select “Register Here”

● Enter details including your name, PAN card, date of birth and mobile number

● Verify with the OTP sent to your mobile number

● Once you verify, a preview page will appear, where after double-checking the infor, you need to click on submit

● Next you need to complete the KYC procedure. Once done, you need to fill additional personal details and make a declaration under PMLA and FATCA. Additionally, you need to confirm your address

● Select your bank and upload a copy of blank cheque

● Once you do so, an amount is credited into your account which you need to input to complete bank verification. Post it, you need to fill in the nominee information.

● Next, you will be redirected to the application summary page where upon clicking “Submit”, the registration process is done

Investing in bonds via RBI Retail Direct has some benefits. You need not pay any fee for opening and maintaining the account. While government bonds may not face credit risk, they do carry interest rate risk. However, note that here too you need to hold on to the bonds until maturity, as selling them in a rising interest rate scenario can result in losses.

Note that the buying proposition can be a little tricky if you buy bonds from the secondary market. In such a scenario, gilt mutual funds can be a better option as it offers a diversified portfolio and helps you contain volatility.

Buying Bond ETFs

Buying Bond ETFs is another way to invest in bonds. Bond ETFs are passive investments and traded like stock ETFs on exchanges. These ETFs invest in bonds like traditional bond mutual funds and as they are passive investments, they have much lower costs compared to active funds. 

They have defined maturity periods which could range from 3 to 10 years. If you are saving for some short-term goals and do not want too many risks then you can contemplate investing in bond ETFs.

Bond Platforms

Bond platforms are another way to invest in bonds. To invest, you need to open a trading account on these platforms after completing KYC formalities. While the minimum ticket size varies across platforms, most platforms allow you to invest from as little as INR 1000.

Through these platforms, you can buy government bonds, corporate bonds, and perpetual bonds, among others. These platforms offer a secure environment from where you can carry out the required transactions. However, before choosing a platform, do check out its review and adopt due diligence.

Bottom Line

You need to consider certain essential things while investing in bonds. Note that the interest received from bonds is fully taxable, and if you fall in the high tax bracket, your tax outgo may increase.
Also, while buying bonds, you must ensure that the securities are of high quality (AAA rated). Else, you might find it difficult to sell in the secondary market. In other words, liquidity can be an issue with securities with low grades. Having said that, if done right, bonds can help you easily diversify your portfolio and sail through volatile times with ease.