What are bank bonds and what are the benefits of it?

In the finance sector, bank bonds guarantee debts in which the borrower owes the lender a debt for which the borrower is obligated to repay the principal on maturity along with interest at a fixed interval, at agreed terms. These bonds are backed by the government of India and can be subscribed to at any time.

Interest can be paid annually or semi-annually. Bonds are a great option for raising funds for a business without giving the investor the right of ownership in the company.

Bonds work using a coupon rate, which is a fixed interest rate for the lender and is popularly known as a fixed-income security.

For example, if an organization, XYZ Ltd., wishes to raise funds for its distant business requirements, it can take out a loan from the issue of bank bonds.

Bonds are a tool for raising business funds for the borrower and a secured and fixed source of income for the lender.

In bonds, maturity is when the principal or face value is paid back to the lender.

Bonds can be invested in for a minimum of Rs 1,000 and increased in multiples of face value. There is no limit on the maximum investment.

Eligibility for investment in Bank Bonds:

There are no strict eligibility criteria for applying to bank bonds.

Any person who is a resident of India can invest in these bonds. Individually, on a joint basis, or on behalf of a minor, a person can invest in these bank bonds without any restrictions.

Features of Bank Bonds:

• Non-resident Indians cannot invest in these bonds.
• The maturity period for these bonds is 7 years.
• The minimum investment amount is Rs 1,000, and there is no capping on the maximum amount.
• Income earned from these bonds is taxable.
• These bonds are non-transferable.
• Premature redemption is available only to senior citizens.

Benefits of bank bonds:

• Low minimum investment: The minimum investment in these bonds is Rs 1,000 and can be increased in multiples of face value. This is one of the reasons why investors prefer bank bonds. Due to this minimum investment, even a person from an economically weaker background with an account in a bank can invest in these bonds.

• Online/Offline Application: The government has made the application to bank bonds accessible to all through both online and offline mediums. Those who prefer everything online can apply online. Those who don’t have the medium for applying online or aren’t tech-savvy can fill out a form at the branch to apply.

• No limit on maximum investment: To ensure that investors reap the maximum benefits of these bonds, the government has kept no maximum limit for investment. Those planning to invest a big amount can apply for these bonds.

• Income or capital appreciation: Investors have a choice to obtain interest income or capital appreciation. Those who choose the interest income option receive interest twice a year, every six months. Those who prefer capital appreciation receive the cumulative amount for interest and principal on maturity.

• Modes of payment: To make it a feasible and hassle-free process for everyone, payments can be made through cash, DD, cheque, or online. This makes the payment process easy for investors.

These are a few reasons why people prefer to invest in bank bonds. If you plan a safe investment with a fixed return, buy bonds like bank bonds.

Types of Bonds:

• Fixed-rate bonds: These bonds provide fixed interest amounts until maturity. Investors earn fixed and guaranteed returns under all circumstances through these bonds.
• Floating-rate bonds: As the name suggests, the interest rate in these bonds is not fixed but keeps changing. It varies during the tenure, depending on the pre-set benchmarks.
• Zero-coupon bonds: If you invest in these bonds, you won’t get periodic coupons during their tenure. The investors purchase these bonds at a discounted price, but they receive the par value.
• Perpetual bonds are debt securities without maturity. In these bonds, investors don’t receive the principal amount but coupon payments until perpetuity.
• Inflation-linked bonds: These bonds are formed to minimize the impact of inflation on the face value and coupon payments.
• Convertible bonds: The investors who own convertible bonds can convert them to a fixed number of equity shares in the issuing company at a particular time.
• Callable bonds are high-coupon-paying securities in which the issuer can redeem them at a pre-agreed price and date.
• Puttable bonds: The bondholder can return the bond and ask for principal repayment at a pre-agreed date.

Out of all these types of bonds, you must choose the one that fits your investment expectations, return expectations, liquidity options, and other factors.

Things to consider before finalizing bank bond investment:

Before investing in any scheme, you must always know the offerings. Here are a few points to consider before investing in bank bonds.

• Be sure about your expectations from the investment and compare them with the actual results the bonds can provide. Buy bonds you want to invest in depending on the risk or return in each.

• Always check the credibility/creditworthiness of the issuer. Before you buy bonds, check their ratings to avoid default in payment.

• You must have some expectations about the liquidity of your investment. Do compare it with the results.

Always be an informed investor. Read, analyze, and then invest. If you are planning to invest in bank bonds or RBI bonds, this information will help you understand the basics of these bonds, the types of bank bonds, their features, benefits, and other minute details.

Have a safe and fruitful investment!