Bonds are issued by different institutions for different purposes. It is important for you to know and consider that you have the credibility and trust of the bond issuing company to return your money. Also, another important factor is the reason for your investment. Are you investing in a tax-free income or do you need a regular-term income? Maybe you’re investing to build a more diverse investment portfolio. Whatever the reason, having a better knowledge of the different types of bonds in the market will help you make your decision, so you can choose the investment option to meet your financial needs.
Here are some insights into the different types of bonds on the market:
- Government Bonds
Government bonds are issued by the national government and are also known as ‘sovereign debt’. This means that these bonds will be repaid using the tax collected from the people. Such bonds are considered to be the safest and risk free investment option if issued in a stable country with a growing economy. A risk-free investment option without deducting resource tax, government bonds are an attractive investment option for low risk, low risk individuals looking for stable risk. Earlier, investments in government securities could only be made through banks and post offices, however, now retail investors can buy these securities using demat accounts.
- Municipal Bonds
Municipal bonds are issued by the Department of Transport, Department of Health Services through local or state level government or other government agencies to get funds for government work. Credit Rating Agency – SEBI has directed that all municipal bonds should have a rating above the investment grade for public issue. Furthermore, the minimum premature term in a municipal bond should be 3 years. Like government bonds, municipal bonds are the safest investment option, as they support the government’s ability to repay the amount invested. Another advantage is that all municipal bonds come under tax-free investment.
- Public sector Bonds
Public sector bonds are bonds issued by institutions in which the government owns more than 50%. These bonds are usually medium to long term bonds with a maturity period of more than 5 years. Some PSU bonds also come in the form of tax-free investments. PSU bonds are clearly guaranteed and this leads to more stability. However, it is up to the investor to check their research and background to check the credibility of the issuing company.
- Corporate Bonds
Large companies and financial institutions account for a large share of the corporate bond market. Depending on the maturity period, corporate bonds can be classified as short-term, intermediate or long-term, up to 12 years. The biggest difference between government bonds and corporate bonds is the high yield rate. Corporate bonds do not enjoy a stable position of the government and therefore have a higher interest rate. However, corporate bonds will offer a good rate of fixed returns. Most corporates with good credit ratings and market reputation are less likely to default and therefore it would be better for them to invest in research and background checks.
- High-Yield Bonds
High-yield bonds are issued by new entrants to the market or by institutions that have not yet earned a good reputation. These bonds have a lower rating than corporate bonds and offer higher yield rates. For high-risk appetite investors, these bonds are opportunities that they have taken advantage of to make an immediate profit. Investors should understand the risk factors involved in this type before investing.
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