How to understand fixed income investment (bonds) in India? The term bonds has in the past been the generic term for fixed income securities in India with security (the borrower is 'bound' to repay capital). Gilts are therefore bonds. However, in recent times the term 'bond' has also been used in the name of some equity based investments, for example investment bonds issued by insurance companies. Read More - Why should you investment in bonds in India?
Local and foreign government bonds It is possible to invest in government bonds in india and they work like gilts. The only difference is that the risk of non payment is greater, so the yield is higher. Guaranteed income and growth bonds These guarantee a relatively high return over a period, such as five years, with a full return of capital. They are more attractive during a period of falling interest rates, as the level of interest reflects the going rate at the time of Purchase bonds Income payments are made free of basic tax. They are not suitable for non taxpayers as tax deducted cannot be recovered. With income bonds interest rate is paid out periodically whereas with growth bonds it is retained till the end of the investment period. Otherwise, they are identical. High income bonds Here a high fixed interest rate is paid for a period, usually around five years. The problem with them is that the capital value
can be eroded. Usually there is a condition that, if a selected stock market index falls over the investment period by specified amounts, then the capital gain bonds will be reduced by an appropriate percentage. The lesson here is to read the small print. Corporate bonds These are company fixed interest investments. They operate like gilts as the interest rate is fixed and so the market price varies. Interest is taxable but capital gains are tax free. Tax free bonds for senior citizens called as Corporate Bonds in India. Debentures and loan stock Invest in Debentures are company fixed interest stocks which are secured on the company's assets. The term loan stock is used to describe unsecured company fixed interest stocks. Both have redemption dates when the loan will be paid back at a stated price. Like gilts, the rate of interest is fixed and the market price will vary. Interest on loans is payable whether or not there are any profits and takes preference over dividends. Interest rates are usually
quoted gross. Also like gilts, capital gains are tax free. Preference shares These are shares in a company rather than loans to it and usually do not have a redemption date. A fixed dividend is payable out of profits, usually before any dividend on ordinary shares (hence the preference). The market price will vary in accordance with the current rate of interest. Dividend rates are usually quoted net of tax. Other corporate bonds Zero coupon bond are sometimes available. Interest is not paid out but is 'rolled up' till redemption or sale and is then subject to capital gain tax rather than income tax. 'Bulldog' bonds are those issued by foreign companies on the sterling market. They give higher yields because of the greater risk. Eurosterling bonds are issued by companies in the EU (other than UK companies). They are usually bearer bonds, which means they are like currency
notes so you need to keep them safe! Corporate bond funds Unit trusts and investment trusts are mostly equity investments. However, there are also corporate bond funds which invest in a number of individual company bonds, thus spreading the risk. High yield corporate bond funds invest in more risky corporate bonds, which have a higher yield but more risk of capital loss.