Bond Market Investments

Bonds are a core element of any financial plan for investment and wealth creation. A bond is a debt security and the purchaser of a bond is a lender of money to a government, corporation, or any other entity known as the issuer. In return for the loan, the issuer promises to pay the lender a specified rate of interest during the life of the bond and to repay the principal (face value of the bond) on maturity. It is recommended that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual goals and objectives. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and increase their capital and to receive consistent interest income. Whatever the purpose—saving for your children’s higher education, buying a new home, planning for a stable retirement income or any other financial goal—investing in bonds can help you achieve your objectives. The diversity of fixed-income securities presents investors with a wide variety of choices to tailor investments to their individual financial objectives.

After you decide to invest in bonds, you then need to decide what kinds of bond investments are right for you as the bond market offers investors a lot more choices than the stock market. Asset subclasses of bonds include:
* Different maturities: long-term (10 years or longer), intermediate-term (3-10 year) or short- term (3 years or less)
* Different issuers: government agencies, corporate, municipal, international entities
* Different types of bonds: callable bonds, zero-coupon bonds, inflation-protected bonds, high- yield bonds, etc.

Bonds are considered less risky than stocks because bond prices have historically been more stable and because bond issuers promise to repay the debt to the bondholders at maturity. The bond markets are extremely active, with interest rates constantly changing in response to a number of factors including changes in the supply and demand of credit, monetary & fiscal policy, exchange rates, economic conditions, market psychology and, above all, changes in expectations about inflation. In the recent past, rising interest rates and expectations for economic slowdown have impacted bond prices. As interest rates change, so do the values of all bonds in the marketplace. However, changes in interest rates don't affect all bonds equally. Generally speaking, the longer the bond's maturity, for example a bond that matures in ten years is more affected by changing interest rates. Also, the lower a bond's "coupon" rate, the more sensitive the bond's price is to changes in interest rates.

Virtually all investments carry some degree of risk that you might lose some or all of your investment. When investing in bonds other than government-guaranteed securities, it's important to remember that an investment's return is linked to its credit as well as market changes. The higher the return, the higher the risk. Conversely, relatively safe investments offer relatively lower returns. Bonds that are below investment grade are considered speculative, sometimes they are also called 'junk bonds'. A government bond is a bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Government bonds are usually referred to as risk-free bonds, because the government can raise taxes or simply print more money to redeem the bond at maturity.

In India, individual investors can consider investment in Bonds by direct investment in Bond issues or through Debt oriented Mutual Funds. The options for direct investment in Bonds include:

• Govt. securities issued by RBI through banks- the tenure of these bonds can be between 2-30 years and interest is paid semi-annually. These can be held in a Subsidiary General Ledger (SGL) acccount maintained with your bank.
• RBI savings Bonds- these are taxable and the tenure is fixed by RBI, interest is paid semi-annually or you can opt for the cumulative option as well
• Infrastructure Bonds- issued by specific institutions such as NHAI, REC etc., they carry special tax exemptions under section 80C of IT Act, but have a 3 year lock in period. These bonds are rated by credit rating agencies. Loans can be availed under all the above bonds from banks.