Understand Intricacies of Investment in Bonds

Almost all stock trading companies offer Bonds to their investors. Let us first understand basics of Bonds.

Bonds are the most common lending investment traded on securities markets. Usually in a portfolio, Bond funds account for about 15 percent of all mutual fund assets invested. When issued, a bond includes a certain maturity period with the date when your principal is reimbursed. Also it is clearly specified without any connotation, how a bond earns interest rate for your investment, it is typically fixed (meaning it is not changed over due course of investment period).

There is a catch in fixed interest rates. Valuation of bonds change with changes in interest rates. Let us assume a simple scenario to understand the context of Bonds interest rate. Suppose, you’re holding a bond issued at 5 percent and rates increase to 7 percent, your bond decreases in value. Why would anyone want to buy your bond at the price that you paid if it yields just 5 percent and prospective buyer can get a similar bond earning 7 percent somewhere else?

Types of Bonds

Now, let us further understand types of Bonds and how they are different in terms of investment plans. To better comprehend secure bonds options, you must consult a broking company in India and avail their services.

Bonds deemed as secure investment: This type of bonds depends on the type of institution to which you’re lending your money: Institutions include state, government controlled mortgage holders and corporations (corporate bonds), local governments, municipalities, the federal government boards, treasuries and appointed bodies. Depending on the investment policies adopted by the country, foreign governments or corporations can also issue bonds. The taxability differs and most of the times, the interest paid by a bond is based on the type of institution issuing the bond. Foreign government, private project, mortgage and corporate bond interest is fully taxable. Interest on government bonds issued by Indian institutions is usually free of state and/or central income tax. Tax-free bonds are issued by a government to raise funds for different state projects. One example of such type of bonds is the municipal bonds.

Bonds subjected to performance of the corporate company: Usually such bonds are rated by Credit Rating Agencies. It depends on the credit history of the borrower to whom you invest your money. The better chances of earning interest and return of principal amount from the borrower differs from institution to institution. Research forms important part of investment in such bonds. Bonds issued by less-creditworthy companies usually pay higher yields to compensate investors for the higher risk of losing money in volatility of the project or fund invested.

 Short-term and Long-term Bonds: The maturity periods of the bonds vary on the purpose of funds invested.

Short-term bonds mature in a few years, most preferred by long term investors, intermediate bonds in around 5 to 10 years, and long-term bonds within 30 years.

Long-term bonds usually pay high returns but swing more frequently in valuation with changes in interest rates.

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