What are Sovereign Gold Bonds and are they for you?
Sovereign Gold Bonds are securities issued and guaranteed by the Government of India. They are weighted in grammes of Gold and serve as a substitute for actual Gold. The Government has recently incentivized the online purchase of SGBs.
Benefits of SGBs
- Diversify your portfolio with a relatively stable investment
- Guaranteed by the Government, they give you returns similar to those of gold + 2.5% interest on top of that!
- SGBs can even be used as collaterals for loans!
- You can trade in SGBs as they are listed on the stock markets
- Tax exempt capital gains if held till maturity
Who should consider
Gold has been the instrument of choice for hedgers since long. It's common knowledge that Gold is a good buffer during volatile markets, as its prices move inversely to the equity market. With SGBs, investors get a relatively stable investment while diversifying their portfolios.
What are Listed Non-Convertible Debentures
and are they for you?
Listed Non-Convertible Debentures (NCDs) are Fixed Income securities traded on India's 2 major stock exchanges; namely, BSE and NSE. Investors should consider investing in such NCDs because the yields are high, significantly outpace inflation, and many of them have favourable ratings.
Benefits of Listed NCDs
- Minimum ticket size is usually in the comfortable range of ₹ 10,000
- Higher interest rate when compared to FDs, Postal Savings Schemes or other investments of a comparable nature
- Liquidity if the bonds are listed, because it is possible to sell them on the secondary market before they mature
- If a bond is listed, there is a chance of capital growth, meaning that it might be possible to sell it for more money than it cost on the market.
Who should consider
Investors looking for alternatives to Bank and Corporate FDs who have a medium risk tolerance should consider NCDs. Ideal for those looking to generate fixed income periodically.
What are Corporate Fixed Deposits
and are they for you?
Company Fixed Deposits (Corporate FDs) are term deposits kept for a set amount of time at a set interest rate. Financial and non-banking financial companies (NBFCs) provide Company Fixed Deposits. Various companies' fixed deposits have maturities that can range from a few months to a few years.
Benefits of Corporate Fixed Deposits
- Higher Returns: Benefit from higher returns on Corporate FDs than Bank FDs
- Liquidity: Compared to bank FDs, corporate FDs offer superior liquidity and a shorter lock-in period
- Lower Risk: Take advantage of the lower risks associated with Corporate FDs, which are supported by reputable rating agencies
- Flexibility: Choose from a range of tenures, including monthly, quarterly, half-yearly, or yearly, for your corporate fixed-income investments
Who should consider
If you enjoy the security and liquidity of FDs but want to take advantage of higher returns, Corporate FDs might be right for you. Ideal if you are looking for periodical fixed income.
What are Capital Gains Bonds (54EC Bonds)
and are they for you?
By purchasing Capital Gains Bonds (54EC Bonds), one can save tax outgo on the profitable sale of long-term immovable property – land or building. 54EC Bonds are Fixed Income products that offer investors an exemption from Capital Gains Tax under Section 54EC.
Benefits of Capital Gains Bonds (54EC Bonds)
The primary benefit of Capital Gains Bonds (54EC Bonds) is the tax benefit. You can invest up to ₹ 50 lakhs, which has to originate from capital gains arising out of the sale of immovable property in the last 6 months. The tenure is 5 years and they are rated AAA. The Corporations that issue these Bonds are: Rural Electrification Corporation, National Highway Authority of India, Power Finance Corporation and Indian Railways Finance Corporation.
Who should consider
LTCG in India tends to be steep. There are 2 ways to avoid this taxation: buy another property or opt for 54EC Bonds. Since these are backed by the Government, these instruments are safe and provide good benefits in exchanges for a tenure of just 5 years.
Listed Non-Convertible Debentures vs Corporate FDs
| Listed Non-Convertible Debentures | Corporate FDs |
|---|---|
| Can be traded in the secondary market in demat form, thus they are more liquid. | To liquidate Corporate FDs, one has to approach the issuing company. It may also attract penalties for premature withdrawal. |
| Listed NCDs are subject to interest rate risks. Since NCDs can be sold or traded in the secondary market on the stock exchange, the price will depend upon the market interest rates at the time of sale. | Corporate Fixed Deposits are not subject to interest rate risks. |
| Credit rating from at least 1 rating agency is mandatory for NCDs, which gives you a clearer picture of the risk level involved in the particular issue. | Corporate FD issuers are not mandated to disclose ratings, which makes the product more opaque. |
| TDS is not applicable because NCDs are issued in demat form and are listed on the stock exchange. However, interest earned on NCDs would be subject to income tax. | TDS is applicable. |
Fixed Income vs Equity
| Equity | Fixed Income |
|---|---|
| Issuers | |
| Businesses mostly issue stocks. | Government, financial, or corporate bonds as well as corporate deposits are issued by businesses. |
| Status | |
| Equity shareholders might claim profits because they own a piece of the company. | Owners of bonds are creditors who are solely entitled to the principal borrowed and the interest accrued. |
| Risk | |
| Because it depends on how well the issuing company performs and the state of the market, it is very risky. | No matter how well the company performs, low risk is guaranteed at a stable interest rate. |
| Claim to assets | |
| They have the final say over any assets in the event of bankruptcy. | Debt holders have priority over shareholders in the event of default. |
| Returns | |
| Typically, the higher the risks, the higher the returns. | Lower interest rates, but guaranteed. |
| Dividends | |
| Dividends are given at the management's discretion and are a kind of equity cash flow. | Dividends are not given. |
| Involvement | |
| Stockholders have voting rights because they are the firm's owners. | Bondholders have no voice in corporate decisions or voting. |