Kolkata: Capital market regulator Sebi has uncorked an investor awareness campaign with the slogan ‘Bonds – Ek Sashakt Bandhan’. Bonds are one of the investment instruments which are widely popular among the common people in different countries. But bonds are yet to achieve that status in India. One of the objectives of the campaign is to allow investors in India to strike better balance in their portfolio with bonds. Bonds are debt instruments. It is important to understand the role of bonds. Personal finance strategists point out that Indians are more familiar with fixed deposits in banks and NBFCs, which are used for guaranteed returns. At the other end of the investment spectrum are equities and mutual funds, which are often used for long-term goal planning like buying a house or picking up higher education bills for kids or their wedding expenses. Bonds are fixed income products that are positioned somewhere in between these two extremes. Bonds offer stability in a portfolio, they are not about wealth creation which is better left to mutual funds and equities over the long-term.

What are bonds?

Bonds are instrument used by governments and private companies to borrow money from investors. Viewed from the other when you buy bonds, you lend money to the issuing entity — companies or government agencies. In return they pay you interest at a predetermined period of time and an interest rate. This part is similar to that of our familiar fixed deposit. In the case of bonds, the interest rate is known as a coupon rate.

Both interest and capital gains

While investors regularly get coupon payments, they get the principal value when the bond reaches maturity. “Bonds can be a great investment option, as they offer returns in the form of both interest income and capital gains, which occur when the bond’s price increases from the time of purchase. It’s crucial to keep in mind that even though the coupon rate remains fixed, the price of a bond can fluctuate, which can affect your potential for gains or losses,” states Sebi.

Credit rating of bonds

A very important point to remember is that every listed bond has a rating assigned to it by credit rating agencies. As one understands intuitively, a higher rating high safety and lower degree of risk and lower yields. Conversely, a lower rating could signal the risk involved in the bond is higher but they also might generate higher returns.

(Disclaimer: This article is only meant to provide information. News9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, precious metals, commodity, REITs, InvITs and any form of alternative investment instruments and crypto assets.)