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

Personal Finance

In the finance sector, bank bonds are a guarantee of 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. This is backed by the government of India and can be subscribed to at any time.

The interest can be paid annually or semi-annually. Bonds are a great option to raise funds for a business without providing the right of ownership in the company to the investor.

The working of bonds involves 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. wish to raise funds for its distant business requirements, it can avail of a loan from the issue or bank bonds.

For the borrower, bonds work as a tool to raise the needed funds for a business, and for the lender, it is a secured and fixed source of income.

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

A minimum of Rs 1,000 can be invested in bonds and this amount can be increased in multiples of face value. In the case of maximum investment in bonds, there is no limit.

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 or on a joint basis or 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.
  • 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 to only 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 amount of investment, even a person from an economically weaker background with an account in a bank can invest in these bonds.
  • Online/Offline Application: To make the application to bank bonds accessible for all, the government has made it possible 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 up a form at the branch to apply.
  • No limit on maximum investment: To make sure that investors reap the maximum benefits of these bonds, the government has kept no maximum limit for investment. Those who are planning to invest a big amount can apply for these bonds.
  • Income or capital appreciation: An investor is given a choice to obtain interest income or capital appreciation. Those who choose the interest income option, get the interest twice a year, every six months. Those who prefer capital appreciation, get 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 benefits that people prefer investing in bank bonds. If you are planning a safe investment with a fixed return, buy bonds like bank bonds.

Types of Bonds:

  • Fixed-rate bonds: These bonds provide fixed interest amounts till maturity. Through these bonds, investors earn fixed and guaranteed returns, in all circumstances.
  • Floating-rate bonds: As the name suggests, the interest rate is not fixed but keeps changing in these bonds. Depending on the pre-set benchmarks, the interest rate keeps varying during the tenure.
  • Zero-coupon bonds: If you invest in these bonds, you won’t get periodic coupons during the tenure. These bonds are purchased at a discounted price by the investors but they receive the par value.
  • Perpetual bonds: These are debt securities without maturity. In these bonds, investors don’t receive the principal amount but coupon payments till perpetuity.
  • Inflation-linked bonds: These bonds are formed in a way to have as less impact of inflation as possible on the face value and coupon payments.
  • Convertible bonds: The investors that own the convertible bonds can convert these bonds to a fixed number of equity shares in the issuing company at a particular time.
  • Callable bonds: These are high coupon paying securities in which the issuer can call off the bonds at a pre-agreed price and date.
  • Puttable bonds: In these 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 be sure about 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 that the bonds can provide. Buy bonds that you want to invest in depending on the risk or return in each of them.
  • Always check the credibility/creditworthiness of the issuer. Before you buy bonds, do check their ratings to avoid default in payment.
  • You must be having some expectations about the liquidity from 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 would have helped you in knowing about the basics of these bonds, types of bank bonds, their features, benefits, and other minute details. For more information on investment options and best finance deals, check out:

Have a safe and fruitful investment!