What are bond?
Just as people need money so do companies and government. A company need funds to expand into new avenues. Similarly government require money for lots of social welfare work. Therefore the solution is to raise the money through bonds. A bond is nothing more than a loan for which you are the lender.
A bond is a debt instrument, in which the issuer – company, financial institution, or Government, offers regular or fixed payment of interest in return for the money borrowed by the said issuer. It is for a certain period of time.
Every investor desires to earn returns on its idle funds and at the same time wants the principle to be secured. The issuer of a bond must pay the investor something extra for the privilege of using their money. This extra is interest payments which are made at predetermined rate and schedule. This interest rate is referred as Coupon.
For example, Say you buy a bond with a face value of Rs.1000 a coupon of 9% and maturity of 10 years .This mean a you will receive a total of 90 (1000*9%) of interest per year for the next 10 years. When the bond matures after a decade you will get your Rs. 1000 back.
How do bonds work?
- When you purchase a bond, the authorized issuer borrows money from you for a fixed period of time.
- This money earns you a predetermined interest rate at regular intervals.
- The principal amount is repaid at the end of the maturity period.
How are bonds different from stock/Equity?
Bonds are debt, whereas Stocks are equity. This is important difference between the two equity. By purchasing stocks an investor becomes an owner in a corporation where as by purchasing Debt (Bonds) an investor becomes a creditor to the corporation or government. Basic advantage of being a creditor is that you have a higher claim on assets than the shareholders do. So difference are jotted down below.
- Bond holders are lenders whereas stock holders are owners in the firm/organization/company.
- Bonds have a defined term of maturity while stocks have no fixed time period.
Securities investments are subject to risks. Please read the Offer Document/Prospectus, the issue terms and conditions, carefully before taking any investment decision.
What is a tax-free bond?
- Security issued by a company, financial institution or the government
- Offers regular or fixed payment of interest in return for borrowed money for a specified period
Why these bonds are called "tax-free "?
- You don’t have to pay any tax on the interest earned from these bonds (Income Tax Act, 1961)
Who provides tax-free bonds?
- Government-backed entities
- Public undertakings, such as IRFC, PFC, NHAI, HUDCO, REC, NTPC, NHPC, Indian Renewable Energy Development Agency (IREDA)
How do tax-free bonds work?
- Tenure: You can invest for up to 10, 15, or 20 years – it’s your choice.
- Liquidity: You can easily sell your bonds any time before maturity.
- Safe investment option: You can be sure of receiving the promised regular interest.
- Tax-exempted: You are not required to pay any taxes on the interest you earn.
- Demat account is optional: You can hold these bonds in physical form, too.
Let’s look at an example to understand this well.
Rate of interest
||Total amount of interest per year
||Interest received annually
Though the interest received from these bonds is non-taxable, any profits derived by selling these bonds in the secondary market are liable to taxes.
Who is eligible to invest in tax-free bonds?
- Retail Individual Investors (RIIs) - Including members of Hindu undivided family (HUF) and Non-Resident Indians (NRIs).
- High Net-worth Individuals (HNIs) - who have a low-risk appetite and can invest up to ` 10 lakhs.
- Qualified Institutional Buyers (QIBs) - who have been defined under the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000.
- Corporate, trusts, co-operative banks, regional rural banks
How does one invest in tax-free bonds?
- You can avail these bonds in physical form as well as in Demat mode.
- If you are investing in tax-free bonds during the public issue, you have the option to apply online as well as offline for it.
- If you are investing in tax-free bonds after the public issue, you can invest via your trading account, just like you invest in shares.
Why invest in tax-free bonds?
- Tax-free income
- Low risk
- Easy liquidity
- Demat optional
- Ratings by various agencies available
Eligibility for Investment
- In his or her individual capacity, or
- In an individual capacity on joint basis, or
- In an individual capacity on anyone or survivor basis, or
- On behalf of a minor as father/mother/legal guardian
Portfolio Management Services (PMS)
Portfolio Management Services (PMS) is an investment portfolio in stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professionals that can potentially be customized to meet specific investment objectives.
When someone invest in PMS, He/She owns individual securities unlike a mutual fund investor, who owns units of the entire fund. They have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account may be unique.
Investment Management Solutions in Portfolio Management Services
Discretionary: With this service, the investment choices rests exclusive with the Portfolio Manager.
- Non-Discretionary: Under this service, the portfolio manager proposes the investment designs. The choice as well as the time of investment decisions rest solely with the investor. However, the trade is done by the portfolio manager.
- Advisory: Under this administration, the portfolio supervisor proposes the venture choices. The decision and also the execution of the venture choices rest exclusively with the investor.
PMS gives investors access to an institutional process of money management
- Wealth creation in view of trained venture process is the essence of PMS
Customized solutions by matching the unique needs and objectives of each investor
Effective diversification helps reduce portfolio volatility and enhances risk‐adjusted returns over long term
Who can offer PMS?
PMS can be offered only by entities having specific SEBI registration for rendering portfolio management services. Currently in India PMS is offered primarily by asset management companies (AMCs) and brokerage houses.
Who is an ideal PMS investor?
The Investment solutions provided by PMS cater to a niche segment of clients. The clients can be Individuals or Institutions entities with high net worth. Ideal for investors who:
- Looking to invest in asset classes like equity, fixed income, structured products etc
- Desire personalized investment solutions
- Desire long‐term wealth creation
- Appreciate a high level of service