Bonds aren't as complex as they may seem. Despite the numerous titles used to describe them – fixed-income securities, debt instruments, credit securities, etc. – bonds are nothing more than a fancy IOU (I owe you) in which the terms, pay-back date and interest rate are carefully spelled out, as in a legal document.
Bonds have a reputation for safety. And that reputation is well-deserved. But that doesn’t mean that bonds are risk free. In fact, bond investors have to worry about things that stock investors never worry about; like inflation and liquidity risk. It is a common misconception that bonds are only for the very old, very rich or very conservative investors. In fact, bonds are an important component of a strategically-balanced portfolio at every stage of any investor's life.
There are three important features to notice in a bond; par value, maturity date and coupon rate. A bond, whether it is issued by a corporate or the government, has a fixed maturity date.
Advantages of Bonds
A Safe Haven for Your Money - In general, investing in debt is safer than investing in equity. The reason for this is the priority that debt holders have over shareholders. If a company goes bankrupt, debt holders are ahead of shareholders in the line to get paid.
Slow and Steady but predictable Returns -: As per historical trends, stocks will outperform bonds in the long run. However, bonds outperform stocks at certain times in the economic cycle. It's not unusual for stocks to lose 10% or more in a year, so when bonds make up a portion of your portfolio, they can help smooth out the bumps when a recession comes around. There are always conditions in which we need security and predictability. Retirees, for instance, often rely on the predictable income generated by bonds.
Returns from Bonds/Debt instruments have outperformed Equity markets in the span of last 4 Yrs.
Better than bank FDs: Sometimes bonds are just the only decent option. The interest rates on bonds are typically greater than the rates paid by banks on savings accounts. As a result, if you are saving and you don't need the money in the short term, bonds will give you the greatest return without posing too much risk.
So whether you are just starting out in your career or you are already enjoying retirement, or if you are somewhere in between, bonds should be a part of your investment portfolio.
The shining Indian bond market
It is expected that the Indian bond market will be a formidable force to reckon with as investors increasingly look for secure investment opportunities where they can be assured of a fair return with low risks. The mood is upbeat and Indian bonds have been able to get a lot more investors in recent years.
The main reason for the rise in Indian bonds is that they have a high amount of liquidity. The increasing instability of the stock market has also fuelled the growth of bonds. There are also more companies offering quality bonds these days which has made the investor check out the offers and plough in his or her money into bonds. The market is more liquid and the fixed income feature is also these days more favored by many investors. Many financial experts studying the scenario in India are very upbeat about the bond market.
Tax Implications
Income-Tax: Interest on bonds will be taxable under the Income-Tax Act, 1961 as applicable according to the relevant tax status of the bond holder.
Interest received on regular interest bonds is taxable at normal rates. Further the difference between the purchase and sale price of the bond is treated as capital gains.
Deep Discount Bonds - difference between the purchase and sale price of the bond is treated as capital gain. i.e. the full returns are treated as capital gains and hence these are tax efficient if held for more than 1 year.
Bonds held for a period up to 12 months can result in short term capital gain that is taxed as ordinary income.
Summary
• Bonds are a good alternative to FD and FMP.
• Most of the bonds are listed and can be traded like your equity shares online; many of the bonds have decent volumes and offer opportunities for quick liquidation.
• Bonds are good options when markets are volatile and interest rates are going high.
• Bonds investment is as simple as buying a share.
• Safe and sound investment option for people looking at risk free avenues.
Bonds are over valued.
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