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A bond is a loan you make to an institution. You can make the loan to the government, a state, and a local municipality or to a company. Companies and Governments need this money to finance projects like new buildings and roads. When you lend money to the institution, the IOU (I Owe You) they give you is called a bond. This IOU is their promise to repay both your principal (the amount you lend) and a fixed amount of interest for allowing them to borrow your money.
As a bond investor, you have many choices that you may not even be aware of:
- Public Sector Bonds (both central & state)
- Private Sector Bonds
- Municipal Bonds
- Financial Institution Bonds:
HDFC, ICICI, IDBI etc.
- RBI 8% Relief Bonds with a tenure of 5 years.
- Government Securities:
11.50% 2011, 12.50% 2004 etc.
- Income funds:
They invest in a diversified mix of corporate and government securities. They
are suitable for a 1-year time horizon.
- Gilt funds:
They invest only in Government securities that have no credit risk. They are
suitable for a 1-year time horizon.
- Short-Term Funds:
They invest in a mix of corporate and government securities of short-term
maturities such as 1 to 3 years. They are suitable for a period of 6 months.
- Fixed Maturity Plans:
They invest in different bonds of varying maturities depending on
the duration of the plan. For example, if it is a yearly plan, it may invest
in a portfolio of bonds that will mature in about a year. If it is a quarterly
plan, it will invest in appropriate portfolio of debt instruments that will
mature in a quarter.
- Liquid Funds:
They invest in very short-term bonds such as Government treasury bills (91
day), Commercial Paper, Debentures, Call and Repos. They are suitable for
upto 6 months.
- As you can see, you have a wide variety of choices when it comes to investing
in bonds depending on your time horizon and investment requirements.