Bonds (government and corporate)
Companies need funds to undertake good projects that yield high returns. Therefore, they issue bonds to raise capital from individuals who want to invest their savings. Similarly, government needs funds for various developmental projects. It also needs funds to finance fiscal deficit. Therefore, government too issues various kinds of bonds.
A bond has a specific maturity date, ranging from a few days to 20-30 years or more. Based on the maturities, bonds are classified as bills, short -term bonds or long - term bonds. It has a fixed face value that has to be returned to the investor upon maturity. During the tenure, an investor gets interest regularly. The interest is calculated as a certain percentage of face value and is known as ‘coupon'.
In addition to safety, bonds provide you capital tax benefits. It is advisable to invest in bonds through mutual funds since they provide liquidity and diversifies your investment at an amount as small as Rs. 5000. In bonds too, you should check the ratings.
In the current scenario investors should invest in instruments having shorter maturities like short term debt funds and liquid funds offered by various asset management companies. Income funds and gild funds with relatively longer maturities should be avoided since the long term view on the debt market looks uncertain at this stage. Short term funds with maturities of 3-6 months would be good options in present conditions.