Bonds are debt instruments that offer fixed interest income on maturity and principle amount at the end of its tenure. On account of fixed returns, bonds are considered to be safe investments and are preferred by many investors against the high profit high risk stock market. In case of liquidation of the company bond holders always have the first right over equity shareholders for compensation of there investments as they are the lenders of the company.
When a corporate/Public Sector Unit/FI/Banks decide to raise capital through issuance of bond, an advertisement in the media is published. If the issuance is through public issue than it is open for the retail investors as well as financial institutions (FI) however, if the issuance is through private placement then it would be open only to the FIs.
The procedure for investment in bonds can be classified broadly into two categories:
Investment in corporate bonds: For investment in the bond issued by a company one has to fill an application form and submit it to any of the branches of the issuing company with the application fees and required documents. These documents may include copy of your PAN card, address proof, identity proof etc. If you have a demat account you can fill the details in the form and the bonds will be credited into your account. In case you do not have a demat account you can chose to receive the bond in the physical form.
Investment in Government bonds: These bonds are sold through official distributors, designated branches of banks and post offices. To invest in these bonds you will have to submit the filled up application form with the required documents as mentioned above. Thereafter bond certificate will be issued in the name of the investor.
Redemption of bonds :
For bonds held in physical form, the bondholders are required to surrender the bond certificates duly discharged by the sole holder/ all the joint holders at least one month prior to the redemption date to the bank . The proceeds of the redemption will be transferred to the account of the bondholders on the record date fixed for this purpose.
In case of bonds held in electronic form, the redemption proceeds would be automatically paid to those bondholders whose names appear on the list of beneficial owners given by the Depositories to the Company.
Tips for investment:
- Invest in bonds with high credit rating by a recognised credit rating agency such as CRISIL, CARE, FITCH etc.
- Study the past performance and financial health of the corporate issuing the bond.
- If you are not sure of investment in a type of bond or are new in this field of investment then it is recommended to take professional advice.
NOTE: Taxation - No Security Transaction Tax is applicable on corporate bond trading however, capital gain tax - short term as well as long term is applicable.
