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Bonds

Investment Bonds are debt instruments in which the authorized issuer owes the bond holders a debt. Depending on the terms of the type of bonds, the authorized issuer is obliged to pay interest and/or repay the principal at a later date upon maturity. In simpler terms, a bond is a formal contract to repay borrowed money with an interest at fixed intervals. Investment bonds are a way to raise money. When you purchase any type of bond (government, convertible, callable, etc.), you are lending money to the issuer which may be a corporation, the government, a federal agency or any other entity. In return, the issuer promises to pay a specified rate of interest during the life of the bond. The issuer also repays the face value of the bond when upon maturity of the term.

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Why Bonds

Feature

Bonds

Fixed Deposits

Safety

Most bonds are secured in nature as its backed by Assets All FDs are unsecured. Bank FDs are insured up to Rs 1 lakh (capital & interest) per depositor

Liquidity

Can be liquidated anytime as bonds are tradable on exchanges. Bonds don’t have lock-in period. Can be withdrawn pre‐maturely, however, at reduced interest rates.

Returns

Offers fixed returns and possibility of capital gains Returns are fixed. Cannot be traded hence you cannot take advantage of interest rate changes in the economy

Credit Rating

It is mandatory for issuers to get the instrument rated by at least one credit rating agency Mandatory for NBFCs but not for others. Bank FDs are not rated

Taxation

As per the tax slab of the individual other than tax free bonds As per the tax slab of the individual

TDS

Listed bonds and NCDs held in demat mode do not attract TDS (as per section 193 of I.T. act). TDS is applicable if interest exceeds above prescribed limit.

Interest payout Frequency

Monthly/Quarterly/Semi-annually/Annually/Cumulative Monthly/Quarterly/Semi-annually/Annually/Cumulative

Price

The price of the bond may fluctuate while investor holds the bond Bond funds are not valued by a price but a net asset value (NAV) of the underlying holdings in the bond portfolio

Principal Amount Risk

Bond holder receives principal amount invested at a time of bond maturity. Hence, there is no loss of principal amount As bond funds consider NAV and not the price, investor can lose some of their principal amount if NAV falls

Returns / Interest Rates

Returns are fixed and hence can be useful for investor to determine exact returns at maturity of the bond Returns vary depending on market conditions and interest rate scenario in the economy

Credit Risk

Invest in higher credit quality securities with better returns Depends on credit quality of underlying securities in which the fund invests

Liquidity

Most listed bonds are liquid and tradable on exchange Investors can generally sell fund shares at any time, at the current market valuem (or NAV) of the fund. Some funds may carry a redemption fee/exit load.