A lot of long term money in India flows through fixed income products. When you look closely you will find two common names that often confuse people. These are bonds and debentures. If you learn the small but important differences you can make smarter bonds investment decisions with less stress.
Simple meaning
A bond is a loan you give to a government or a company. In return you get interest on fixed dates and your principal at maturity. A debenture is also a loan but the term is mostly used for money raised by companies from the public. In daily language both feel similar yet they are not the same. Knowing this helps you build a clear bonds investment plan.
Who issues them
Bonds are issued by the central government and state governments and public sector units and companies. Debentures are usually issued by private or public companies. Governments rarely use the word debenture. If your goal is a simple bonds investment with the highest safety you may start by looking at government bonds.
What backs your money
Government bonds are backed by the tax power of the government. That support makes them very safe. Company bonds can be secured by assets like land or equipment. Debentures can be secured or unsecured. A secured debenture has a charge on assets. An unsecured debenture is supported by the overall strength of the company. Before any bonds investment always check whether the instrument is secured and who stands behind it.
Interest and risk
Both can pay fixed or floating interest. Government bonds tend to offer lower rates because risk is low. Company bonds and debentures may offer higher rates because risk can be higher. Credit rating shows the chance of getting interest and principal on time. Higher rating means safer cash flows and usually a lower return. Never chase only the rate when doing bonds investment. First match the safety to your needs.
Extra features
Some debentures can convert into shares after a period. These are called convertible debentures. Most plain bonds do not convert into shares. This is one big difference. Convertibility can add upside but it also adds equity like behavior. If you want a steady bonds investment you may avoid convertibility.
Trading and liquidity
Both bonds and debentures can be listed on exchanges. If listed you can try to sell before maturity. Liquidity however can vary a lot. Government bonds usually have better trading volumes. Many company debentures trade less often. When planning a bonds investment do not assume an easy exit. Check trading history and settlement rules.
Paperwork and regulation
All offers come with documents that explain terms like coupon dates and security and covenants and risks. Read them line by line. Pay attention to put and call options because they change your cash flow timing. Good bonds investment comes from understanding the paperwork not from guesswork.
What should you pick
If safety is top priority choose government bonds. If you want a little more return and can accept some risk choose high rated company bonds or secured debentures. Keep amounts split across issuers and sectors. In short bonds are the big family and debentures are a popular member for company borrowing. Learn who is borrowing and how they will repay and you will make stronger bonds investment choices.
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