Bonds

Bonds are a way to lend money to a company or government, earning interest (known as coupons) at set times and getting your principal back at maturity.  There are different types of bonds like corporate bonds, non-convertible debentures (NCDs), and Sovereign Gold Bonds (SGBs), each offering benefits to suit your investment needs and risk levels.

Corporate bonds and Non-Convertible Debentures (NCDs) offer steady, predictable income with interest or coupon rates typically higher than bank deposits. They come with credit risks based on the issuing company’s creditworthiness. Ratings by agencies like CRISIL and ICRA provide insights into their safety. NCDs provide options for regular income with monthly, quarterly, or annual interest payments. They also offer wealth growth through cumulative options, where interest is reinvested and paid at maturity. Both bonds and NCDs can be traded in the secondary market, offering an exit option.

Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold, providing a substitute for holding physical gold. They offer interest coupon and capital appreciation, with a minimum investment of 1 gram and a tenure of 8 years. They are exempt from capital gains tax on redemption.

Bonds offer a great alternative to traditional bank deposits, providing fixed returns and diversification. They balance risk and return by generally moving in the opposite direction to interest rates. Longer maturity bonds are more sensitive to interest rate changes. Bonds are typically less volatile than stocks. They come with clear credit ratings from agencies like CRISIL and ICRA etc. Higher-rated bonds are safer, while lower-rated bonds may offer higher returns but with more risk.

Interest income from bonds is generally taxed according to your income slab. Profits from selling listed bonds after 12 months are subject to long-term capital gains (LTCG) tax at 10% without indexation. Short-term capital gains (STCG) are taxed at your income slab rate. Non-listed bonds are taxed at your income slab rate, regardless of the holding period. It’s important to understand the potential risks, including interest rate sensitivity, credit quality, and tax implications.