How to Invest in Bonds

There are different ways through which retail investors can buy bonds in India. Some of these channels are discussed below:

Ways to Buy Corporate Bonds in India

You can invest in corporate bonds through the primary market at the time of bond issuance or from existing bond investors through the secondary market.

1. Primary Auctions

A company can issue bonds through primary auctions using two methods:

• Public issue: In this, the bond issuing company invites people to subscribe to its bonds. After the public issue concludes, these bonds are listed on NSE or BSE, thus making them listed bonds.
• Private placements: These are usually offered to a select group of individuals (up to 200 individuals) in addition to qualified institutional buyers.

2. Secondary Market

The mediums available to purchase corporate bonds through secondary markets are as follows:

• Stock exchanges: Retail investors can buy listed bonds directly from the existing investors through the stock exchange(s) at prevailing market prices.
• OBPP (Online Bond Platform Providers): OBPPs are regulated online marketplaces where investors can buy and sell bonds. These platforms leverage technology to offer a broad selection of bonds, real-time market data and more, thus, enhancing accessibility, ease of use and transparency for retail investors.
• Investors can also explore corporate bonds directly through the Paisabazaar website or app. It provides a simple and convenient way to buy SEBI-regulated (AAA-BBB) corporate bonds offering fixed returns of up to 13.25%. The platform ensures a transparent, secure and seamless experience, making it suitable for both new and experienced investors. Investment starts from Rs 1,000. Additionally, investors can also compare fixed deposit rates on the platform and make investment decisions based on their goals and risk appetite.

To start investing in corporate bonds through Paisabazaar, follow the steps below:

Step 1: Login to your Paisabazaar account

Step 2: Select the bond

Step 3: Complete the KYC process

Step 4: Enter bank details

Step 5: Link your demat account

• High returns – Earn fixed returns of up to 13.25%.
• Low risk – Invest in a range of highly rated (AAA-BBB) corporate bonds.
• Flexible payout – Receive your interest income in your demat linked bank account.
• Low investment – Start investing with as little as Rs. 1,000.
• Safety & security – Invest in SEBI-regulated senior secured bonds to enjoy higher claim priority over other bond holders and shareholders in case of default or liquidation.
• Sell anytime – Sell bonds anytime through Paisabazaar.
• Transparency – Real-time price discovery and assured transaction.
• No brokerage/commission – Invest without paying any brokerage or commission fee.
• End-to-end digital process – Enjoy seamless end-to-end digital process.

Here are a few simple tips that retail investors must follow to manage their risks when investing in bonds:

• Check credit rating of the bond issuer: Credit rating of a corporate bond indicates how likely a bond issuer will repay the debt, helping investors understand the risk involved in a particular bond. The rating ranges from AAA to D. Corporate bonds with AAA rating, usually, are the safest with a very low chance of default, followed by those rated till BBB. Those rated lower carry higher risk but also offer higher yields.
• Check the bond issuer’s financial health: Besides looking at the bond’s credit ratings, it is important to look at the bond issuing entity’s financials too. Careful assessment of balance sheet, P&L account, leverage ratios, etc. will help investors evaluate the financial health of the bond issuing entity.
• Check if the bond is backed by a collateral: Secured bonds are backed by the assets of the bond issuer, and therefore, are much safer than unsecured bonds. So, if the bond issuer defaults on its repayment obligations, the pledged assets can be sold off to repay the bondholders. In such a case, among secured bondholders, senior secured bondholders will have the highest priority to receive repayments (right after the payment of statutory and tax dues).
• Know the frequency of coupon payments: Bonds offer coupon payments at regular intervals, i.e., monthly, quarterly, half-yearly and annually. Before you start investing in a bond, check the frequency of its coupon payments and ensure that it matches with your cash flow requirements.
• Compare Yield to Maturity (YTM): The YTM of a bond is the annualised rate of return if the bond is held till its maturity date. A bond’s YTM calculation factors in the bond's current market price, par value, coupon interest rate and term to maturity. Therefore, when deciding which bond to invest in, compare bonds’ YTMs instead of their coupon rates.

• Investors receive a steady income stream in the form of fixed interest payments, which is paid at regular intervals.
• At maturity, the bond’s principal is repaid, which makes it apt for investors seeking capital protection amid market volatility.
• Including bonds in your investment portfolio can also help in offsetting the risks related to more volatile instruments like stocks and equity mutual funds.
• It offers higher stability to risk-averse investors as it usually displays lower price volatility than stocks.
• Bonds’ features such as fixed returns and the guarantee to return the principal at maturity help investors manage their cash flows and income requirements better.
• Bonds, if sold at higher prices before maturity, can also generate profits for investors.

Bonds in India can be classified into several categories depending on the type of issuer, coupon payments, tax treatments/benefits, collateral, etc. Here are some of the important bond categories that investors should know.

• Corporate Bonds: For financing operations, expansion, consolidation of debt, etc., listed public sector and private sector companies issue corporate bonds.
• Central Government Bonds: The central government issues central government bonds for maturity periods ranging from 5 to 40 years.
• State Development Loans (SDL): State governments issue State Development Loans (SDLs) and are considered almost as secure as central government bonds.
• Municipal Bonds: For financing various development projects, urban local bodies issue municipal bonds.
• Zero Coupon Bonds: As the name suggests, zero coupon bonds do not offer any coupon (interest) payments to investors.
• Capital Gains Bonds: Buying capital gain bonds allows investors to reduce their long-term capital gains (LTCG) tax liability arising from the sale or transfer of their land or building.
• Floating Rate Bonds: The interest or coupon payments of floating rate bonds are linked to predetermined benchmark rates, which if changes could also change the bond’s coupon rate.
• Convertible Bonds: After a specified period, convertible bonds can be converted into shares either at the current market price or at a price pre-determined at the time of the bond issue.
• Callable Bonds: In callable bonds, issuers have the right to buy back these bonds before their maturity dates.