Wealth Services

A bond is a fixed-income instrument that embodies a loan made by an investor to a borrower. Bonds are generally handed out by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. A bond is also inferred as a fixed-income instrument since bonds are traditionally used to pay a fixed interest rate (coupon) to debtholders. Off late, looking at the volatility in the interest rate movements, variable or floating interest rates are also quite popular.
Investors generally feel bonds are safe and secured. Investors need to be cautious while investing in bonds. However, the issued bonds may be secured as well as unsecured in nature. In the case of unsecured bonds due to inherently higher risk, offer a higher interest rate as compared to secured bonds. 
Investors need to note that, Bond prices are inversely associated with interest rates: when rates go up, bond prices fall and vice-versa. The effect of interest rate risk is directly proportional to the average maturity of the bonds, the greater the average maturity, the greater will be the impact of interest rate movements.

1. State Government Bonds

State Government Guaranteed Bonds are safe and senior bonds generally propose a higher coupon rate as compared to their counterparts. The bonds can be both secured as well as unsecured.
There are many benefits in investing in State Government Guaranteed Bonds for both the issuer and the investors.

For issuer:

1. Despite having lower creditworthiness, the issuer can raise capital via issuing State Government Guaranteed Bonds.
2. As State governments do not collect the fee for guaranteeing the bonds hence borrowing cost reduces significantly.

For the investor:

1. In the case of the State Government Guaranteed Bonds, the state government will pay the interest and principal amount if the issuer defaults. This gives an extra layer of security to investors.
2. Most of the time, the State Government Guaranteed Bonds pay higher coupon rates than their counterparts.
3. State Government Guaranteed Bonds are considered as senior debt securities as the guarantee given by the State Government is unconditional and irrevocable.
4. A state-owned enterprise going bankrupt is very rare; nevertheless, if the issuer goes bankrupt, then bondholders of State Government Guaranteed Bonds are paid before the owners of non-guaranteed debts.
5. The State Government Guaranteed Bonds are always in demand; hence liquidity of these bonds is comparatively high.
6. These bonds pay coupons quarterly or biannually, helping investors with regular and frequent cash flows.
7. Most State Government Guaranteed Bonds have staggered maturity. This means that on maturity, 25% of the face value is paid back to the investor per quarter over the entire year along with the outstanding interest payments.

Perpetual Bonds
Our wealth service also provides a brief idea of Perpetual Bonds to our clients. These are typical bonds that have a fixed tenure of maturity, but perpetual bonds, as the name suggests, can theoretically go on for as long as the issuer is a going concern. In practice, though, these bonds have a “call” option, which allows the issuer to reclaim the bond earlier.

Perpetual bonds are instruments mainly published by banks that do not have maturity dates as other bonds usually do. These bonds offer continual interest at a rate that is fixed at the time of allotment. Banks issue these bonds to meet their Tier 1 capital requirement.

Features of Perpetual Bond:

• Although Perpetual bonds are considered a very safe investment, they carry the credit risk of the issuer for an indefinite time. Banks can skip paying principal or interest payments if the bank’s capital adequacy ratio slumps below a specific threshold.
• Reliable fixed income stream.
• Paying the higher interest as compared to regular bonds.
• No need to engage in “reinvesting”.

Tax-Free Bonds

A bond is a fixed income instrument delivering a coupon rate of interest and is issued for a fixed tenure. As the name suggests, interest earned from tax-free bonds is immune from tax. In simple terms, irrespective of the income, one need not pay any income tax on the interest income. Some of the public efforts which raise funds through the issue of tax-free bonds are IRFC, PFC, NHAI, HUDCO, REC, NTPC, and IREDA.

The tenure of the bonds is usually 10/15 or even 20 years. They are also documented on stock exchanges to offer an exit route to investors. The bonds are tax-free, secured, redeemable and non-convertible.

• Tax status: The interest income received is exempt from tax under Section 10 (15) (iv) (h) of the Income Tax Act, 1961. There will, nonetheless, not be any tax privilege on the amount of investment made in such bonds. Also, there is no bearing of TDS on interest income. TDS bearing will still be there on the application money while applying for them.
  Tax-Free bonds are also documented on stock exchanges and traded only through Demat accounts. If there is any capital profit on transferring them on exchanges, that will be taxed. If the ownership period is less than 12 months, capital gains on the sale of tax-free bonds on stock exchanges are taxed as per the tax rate of the investor. If bonds are held for more than 12 months, the profits are taxed at 10.3 per cent. There will not be any benefit of indexation in them.
  Tax-free bonds are hugely prominent with high-net-worth investors because they enable parking a huge lump sum at one place. They are discerned to be very safe as they are mostly issued by government societies and carry high investment-grade marks. Also, the effective pre-tax profit is high for those in the higher salary slab. Although tax-free bonds are low-risk commodities, the effective pre-tax yield seems to be high.
  Liquidity is low in tax-free bonds. Usually, they are documented on stock exchanges to give an exit route to investors.
  The tenure of tax-free bonds being long term, one should carefully invest in them keeping intermittent goals in mind. Investors should invest in them only if you are sure not to use the funds for such a long period.

Gold is so crucial that it has become similar to the word “Wealth.”
Diversification of a client’s portfolio means varying the asset classes. Stocks are one asset class. Gold is another. Owning a company’s stock implies owning an equity stake in a company. The value goes up or down, depending on the changes in the market and the paper certificates can be worth nothing. On the other hand, the value of gold goes up and down and changes with the market but is never worth anything.

Sovereign Gold Bond (SGB):

2. 2. 1. 3. 1. 1. SGB’s are government securities denominated in grams of gold. They are alternatives for holding physical gold. Investors have to expend the issue price in cash and the bonds will be restored in cash on maturity. The Bond is issued by the Reserve Bank on behalf of the Government of India.
                  At present time, for investors looking forward to gold exposure with a long term investment horizon, SGB is the best vehicle to invest in.
                  The quantity of gold for which the investor pays is conserved since he earns the ongoing market price at the time of redemption/ premature redemption. The SGB proposes a superior alternative to holding gold in physical form. The risks and costs of storage are eradicated. Investors are convinced of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewelry form. The bonds are held in the books of the RBI or Demat form eliminating the risk of loss of scrip etc.
                  The Bonds bear interest at the rate of 2.50 percent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.
                  Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961. The capital gains tax arising on the maturity of SGB to an individual has been exempted.

Silver ETF will be one more tool along with gold ETF through which investors can participate in the commodity markets. Markets regulator Securities and Exchange Board of India (Sebi) allowed mutual fund houses to introduce silver exchange-traded funds (ETFs) in the Indian market. Precious metals such as silver, platinum, and palladium can be a way to diversify one’s portfolio away from a single precious metal.