Organisations may require financial support for starting new ventures or growing their existing operations. Private and government entities can raise the required funds by issuing bonds and debentures to investors. The two debt financing instruments have some distinctions. Bonds are secured by an organisation’s physical assets. New investors are more comfortable with investing in bonds, especially those offered by government institutions as they are backed by a guarantee.
On the other hand, debentures as financing instruments for only private companies. The lack of collateral makes investment in debentures riskier. The greater risk is associated with better returns on the investment as compared to bonds. While some debentures can be converted to equities, others cannot be. Investment in non-convertible debentures can be a good way of generating periodic fixed income. There are myriad benefits of NCD investment, a few being offering good interest rates, the possibility of capital appreciation, ease of selling listed debentures etc.
The following are lucrative advantages of investing in bonds and debentures:
1. Stable source of income
The bondholder receives fixed and regular interest payments throughout the tenure of the bonds. Therefore, it is a predictable and steady source of income, immune to market fluctuations. Certain debentures give the flexibility to choose between recurring (monthly/annually) and cumulative interest payments. Furthermore, bonds and debentures offer better interest rates than bank fixed deposits.
2. Safe investment option
Bonds with higher credit ratings and those issued by the government are safer to invest in. The bondholder is entitled to receive the entire principal back after the conclusion of tenure in addition to regular interest payments, thus, investment in bonds is a great way of protecting the capital. In the case of debentures, the capital repayment may be done all at once or may be divided into smaller parts. If the individual owns a secured debenture and the company announces bankruptcy, their assets are sold for repayment. The secured debentures are, thus, relatively less risky as compared to unsecured debentures.
3. Easy liquidation
If any need arises, individuals can sell their bonds or debentures that are listed on the stock exchange to other individuals in a secondary market. For NCDs, It is also possible to sell them for a price higher than the initial cost price.
4. Helps in building a diverse portfolio
Investing in bonds can be a great risk mitigation strategy as it can balance out the risks associated with volatile equities and other investments.
5. Tax benefits
Investing in certain bonds can help in lowering tax burdens. Plus NCDs in Demat mode is linked with no tax deductions at source.
To Sum Up
Though bonds and debentures have several distinctions but investing in them can be highly beneficial as compared to investing in shares. Debentures are generally good investment options for those who are ready to take greater risks and want to make profits in a relatively shorter time. Bonds are highly secure investment options as the bondholder is given priority over a debt holder for principal and interest repayment if the situation of bankruptcy arises.
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