Types of Bonds in India
Bonds are debt securities in which an investor purchases a bond from a government or a corporation and holds that bond until it comes due. At that time, the issuer of the bond will pay the interest earned by the bond in full. In India, there are several types of bonds available to investors, including ones that are only sold privately and a tax-savings bond that releases the investor of a tax burden.
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Public Sector Undertaking Bonds
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If you're looking for a medium- to long-term investment in the Indian bond market, a Public Sector Undertaking bond can be a good choice. PSUs are issued and backed by the government of India, but they're usually sold on a private basis. In other words, the Indian government targets investors themselves and offers the bonds to these investors at fixed rates. An investment banker usually only serves as a middleman in this situation.
Corporate Bonds
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These are more traditional bond instruments, which are offered by private corporations in India for terms that can last up to 15 years. Unlike the government bonds mentioned earlier, anyone can purchase a corporate bond. However, there is a higher risk of default and that can depend upon the corporation backing the bond, market conditions, the company's industry and its investment rating. But the risk comes with a higher return on the investment.
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Financial Institutions and Banks
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Bonds issued by financial institutions and banks in India are a vibrant financial instrument and make up more than 80 percent of the bond market in that country. The reasons are simple. Bonds issued by financial institutions and banks are regulated well and come with good bond ratings. Large-scale investors are some of the most important investors in this category.
Emerging Markets Bonds
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These bonds, issued by the Indian government, are issued abroad as hard currency to raise capital for economic development in third-world countries. What's different about these bonds is that they are usually issued in U.S. dollars or the Euro, which can make them more attractive to investors in those countries. Also making these EM bonds attractive is the interest rate, which while high is typically paid by the issuer. The risk comes in that countries like India have a lower credit rating and the success of the bonds is tied to the success of the country's economic development.
Tax-Savings Bonds
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The Indian government issues special bonds that allow its citizens to be either partially or fully released from paying taxes. Most of them are issued by India's Reserve Bank. These five-year bonds are sold at an interest rate of 6.5 percent and interest is paid off every half-year. The upside for the investor is that by purchasing this bond, they are released from paying taxes on the related interest income, as long as they hold the bond until it matures.
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