Buy Government Bonds
Bonds are debt instruments in which investors loan money to an entity, such as a government or corporate. The money is borrowed for a specific time duration at a fixed rate of interest. When the government issues the bonds, they are called government bonds, also known as fixed income investments.
What is a Government Bond?
Government bonds are debt instruments issued by India’s State and Central Governments. Such bonds are issued when the issuing body encounters a liquidity problem and needs funds for infrastructure development. The bonds issued by the State Governments are called SDLs or State Development Loans. On behalf of the Government of India, the bonds are issued by the RBI to finance the fiscal deficit.
In India, government bonds are typically a contract between the bond issuer and investor. Here, the issuer guarantees interest earnings on the bond’s face value held by investors and principal value repayment on an agreed period.
Government bonds in India are categorized under government securities (G-sec) and are long-term investment tools issued for five to forty years. Primarily, all G-secs were issued for the benefit of large investors, such as commercial banks and companies. But eventually, GOI made them available to smaller investors, such as co-operative banks, individual investors, etc.
How Do Government Bonds Work?
Investors who purchase government bonds lend the government an agreed amount for a stipulated period. The government, in return, will pay you back a specified level of interest at fixed intervals, known as coupon. This is what makes government bonds a fixed-income asset.
The original investment amount (principal) is returned to the investors when the bond expires.
Once the bond expires, your original investment amount – called the principal – will be returned to you. The day on which you receive the principal is called the maturity date. Different bonds will come with different maturity dates – you could buy a bond that matures in less than a year or 30 years or more.
Types of Government Bonds in India
India has different government bond types, which might vary depending on the coupon rates, issuer, and tenure. According to the bond issued, it might come with varying risks and interest rates. By considering these essential factors, investors can make their choice. If you’re not familiar with the types of government bonds India, continue reading.
1. Fixed Rate Bonds
For fixed rate bonds, the interest rates are fixed. Irrespective of the market rate fluctuations, it remains consistent across the investment tenure. These are great options for investors seeking guaranteed interest rates for a stipulated period.
2. s ()
s or s are bonds issued by the Central Government. Tax exemption is provided on the interest earned from these bonds. Investors can invest in gold for a long period without investing in physical gold.
Investors who prefer low-risk investments can consider s. The expenses incurred in purchasing or selling s are low compared to the physical gold. It is a good investment option.
3. Floating Rate Bonds (FRBs)
Floating Rate Bonds or FRBs are subject to periodic changes in their interest rates. The change is undertaken at intervals and is declared beforehand when the bond is issued. For example, an FRB might have a pre-announced interval of six months. The interest rate will change every six months throughout the bond tenure.
4. Inflation Indexed Bonds
The principal amount and the interest earned by investing in inflation indexed bonds correspond to deflation or inflation. Also known as inflation-linked bonds, they are specifically issued to retail buyers. The bond is available for trade in the secondary market.
These bonds are indexed according to the WPI (Wholesale Price Index) or CPI (Consumer Price Index). Such IIBs make sure real returns accrued remain constant. Therefore, investors can safeguard their portfolios against inflation rates.
5. 7.75% GOI Savings Bond
According to the RBI directive, 7.75% GOI Savings Bond can be held by an undivided Hindu family, an individual or individuals who are not NRI, and a minor with legal guardian representation.
These bonds are issued at a minimum of Rs. 1,000. The interest earned from these bonds is taxable per the Income Tax Act 1961. It comes under the purview of the investor’s income tax slab.
6. Bonds with Call or Put Option
In this type of bond, issuers exercise the right to buy back bonds (called the call option) or the right to sell (called the put option) to the issuer. The investor or the issuer buying Bonds with Call or Put Option are in a position to exercise the right to sell or buy back these bonds after five years from their date of issuance.
In any case, the bonds can be bought back by the government at face value. Similarly, the bonds can be sold by investors to the issuers at face value. Therefore, the corpus invested is preserved in case of any downturn in the stock market.