To generate wealth over a longer investment horizon, smart investors should consider investing a sizable portion of their portfolio in financial products that generate moderate returns even with the ups and downs of the market. One such product that meets the desired criteria is bonds.
What are bonds?
Bonds are high-security debt instruments that allow organisations to raise funds and fulfil capital needs. They are issued by companies, governments, municipalities, and other entities to fund their business operations and infrastructural development.
For smart investors, learning how to pick bonds is an important aspect of wealth creation, as it helps them diversify their portfolios and with capital protection. Let’s understand the different types of bonds which investors can include in their portfolio:
- Sovereign Gold Bonds (SGBs): For investors looking to reap the benefits of investment in yellow metal but not the hassle of physically managing it, SGB bonds act as the best option. Along with value appreciation, investors also earn 2.5% interest annually on these bonds.
- Government bond: Governments bonds are issued by central or state governments with fixed or floating interest rates. These bonds are highly stable as they are backed by the sovereign but offer lower interest rates as compared to other products.
- Treasury bonds: These are risk-free bonds issued by the government, to meet their short-term deficit. While these bonds don’t generate high returns, they are highly liquid, can be traded on the stock exchange and require a lower minimum investment.
- Corporate bonds: These are debt instruments issued by companies to raise capital. They tend to use these funds for business expansion, research and development, etc. These bonds yield higher returns as compared to other sovereign bonds.
Investors can follow the below process to add bonds to their portfolio:
- Choose the bond you want to buy: Take the help of your financial advisor to browse through the available bonds in the market and choose the one that aligns with your financial goals.
- Documentation: Retail investors have the option to purchase bonds online from either the primary or the secondary market. To do so, there are specific documentation requirements that need to be met. These include:
- Fill up the application form in case of investment towards a bond issue.
- Go through KYC formalities in the case of secondary market investments. This could involve gathering documents such as address proof, PAN card, cancelled cheque, and a copy of the CMR demat.
- Get the bond units in the demat account:
- Bond issue: Bond units are transferred to the demat account after being successfully allotted.
- Secondary market purchase: During a secondary market purchase, investors are provided with a sample deal sheet or consideration. This contains the details of the transaction. Investors are then required to sign and share a scanned copy of the same, upon purchase.
Based on your risk appetite and financial goals, a financial advisor can guide you on various financial products such as stocks, mutual funds, bonds, ETFs, etc. and help diversify your portfolio to withstand market volatility.