Investment Bonds – All You Need to Know

Investment bonds, also known as insurance bonds or investment-linked insurance policies, are financial products that combine elements of life insurance and investment. These bonds are typically offered by insurance companies or financial institutions.

Investment bonds can be suitable for individuals looking for a long-term investment vehicle with potential tax advantages. However, it’s essential to carefully consider the terms, fees, and investment options before investing, as they may vary between different providers and countries. Always seek advice from a financial advisor to ensure it aligns with your financial goals and risk tolerance.

What are the different types of Investment Bonds?

• Government Bonds –

Government securities whose maturity period is over a year are called bonds, and those that mature in less than a year are called T-bills. Government Bonds are considered to be the safest investment which are issued by the State and Central Governments where the government can print money and repay the borrowers, any time it deems fit.

• Corporate Bonds –

Corporate Bonds are bonds that are issued by companies of different standing and sizes to meet their capital needs. Corporate Bonds offer better returns than any Savings Account or Fixed Deposits as the investors who invest in these funds receive repayment of their bond price and regular interest payments at the expiry of the bond tenure.

• Sovereign Gold Bonds –

These Gold Bonds are issued by the Government of India where the investor gets an opportunity to increase his wealth by investing, gets a great alternative to buying physical gold, and at the same time receives interest on the amount invested. The bondholder is exempted from payment of capital gains tax as well, in case the bonds are held till maturity.

• Convertible Bonds –

These are pre-determined special types of bonds that allow the conversion of the bond amount into equity.

• RBI (Reserve Bank of India) Bonds –

RBI Bonds likely refer to government-issued bonds issued by the Reserve Bank of India (RBI). These bonds are a form of investment where individuals lend money to the government in exchange for regular interest payments and the return of the principal amount at maturity. They are considered relatively safe investments because they are backed by the Indian government.

How to invest in Bonds in India?

ICICI Bank of India gives those keen an opportunity to invest in India’s most trusted Government and Corporate bonds with ease, and at the click of a button, investors can choose attractive returns from a wide range of Corporate Bonds, and different tenures at ease. These Bonds are rated AAA by credit rating agencies and are considered safe investment havens, indicating that these bonds have been issued by trustworthy and reliable companies with extremely low or no risk of default.

Key terms you need to know about Investment Bonds –

1. Maturity Period

Maturity is the term used when the par or principal amount of the bond is paid to the investors and the company’s bond obligation ends which defines the lifetime of the bond. There are three different types in which maturity is classified. They are –

– Short-term: These bonds tend to mature within one to three years.

– Mid-term: These bonds mature normally over ten years.

– Long-term: These bonds usually take longer periods to mature.

2. Is it secured?

If the company cannot repay the obligation, a secured bond pledges specific assets to bondholders which is also called collateral on the loan. One type of secured bond that is backed by titles to the homes of the borrowers is Mortgage-backed security (MBS).

Whereas, an unsecured bond is not backed by collateral and the principal and interest are only guaranteed by the issuing company.

3. Liquidation preference

A firm starts paying out its investors in a particular order as it liquidates once it goes bankrupt. The first debt to be paid off is Senior debt which is followed by subordinated or junior debt after that the stockholders get whatever is left.

4. Coupon

The coupon also called the normal yield or coupon rate, represents the interest paid to bondholders. To calculate the coupon rate, you need to divide the annual payments by the face value of the bond.

5. Tax Status

Some government and municipal bonds are tax-exempt where the capital gains and income are not subject to taxation, while the majority of corporate bonds are taxable investments. Tax-exempt bonds normally have lower interest than equivalent taxable bonds and to compare the return with that of taxable instruments, an investor must calculate the tax-equivalent yield.

6. Callability

Investment bonds can be callable or non-callable, depending on their terms and conditions. Callable bonds give the issuer the right to redeem the bonds before their maturity date, usually to take advantage of lower interest rates. On the other hand, non-callable bonds cannot be redeemed by the issuer until they reach their maturity date, providing more stability for investors. Before investing, it’s essential to understand the callability feature and its potential impact on your investment.

All about Bond Risks –

• Interest Rate Risk:

Interest rate risk refers to the potential for the value of investment bonds to fluctuate due to changes in interest rates. When interest rates rise, existing bonds with lower fixed interest rates become less attractive to investors, leading to a decrease in their market value. On the other hand, when interest rates fall, existing bonds with higher fixed interest rates become more appealing, potentially increasing their market value.

• Default or Credit Risk:

The default risk of investment bonds refers to the likelihood that the issuer of the bond will be unable to meet its debt obligations, resulting in a default on interest payments or principal repayment. Bonds issued by entities with higher credit ratings generally have lower default risk compared to those with lower credit ratings. It’s essential to consider default risk when investing in bonds, as it affects the potential return and safety of the investment.

• Prepayment Risk:

Prepayment risk refers to the possibility that the issuer of an investment bond may pay back the principal amount before its maturity date. This can be a concern for bondholders because if the bond is repaid, they may miss out on receiving interest payments for the remaining period. It’s more common in certain types of bonds, like mortgage-backed securities, where borrowers may refinance their loans, leading to early bond prepayments. Investors should carefully assess prepayment risk when considering bond investments to understand the potential impact on their returns.

Key benefits of Investing in Bonds –

Investing in bonds offers several key benefits, such as:

1. Steady Income: Bonds provide regular interest payments, offering a stable income stream for investors.
2. Preservation of Capital: Bonds are generally considered less risky than stocks, making them a safer investment to preserve capital.
3. Diversification: Bonds can diversify a portfolio by balancing the risk of equity investments.
4. Predictable Returns: Bonds typically have fixed interest rates and maturity dates, making their returns more predictable.
5. Liquidity: Bonds can be bought and sold in the secondary market, offering liquidity to investors who may need to access their funds.