Where to Buy Zero-Coupon Bonds in India?
Posted: Mar 05, 2022
In FY22, public sector banks will get approx Rs. 15,000 crores capital infusion through zero-coupon bonds. In the last fiscal year, the amount was Rs. 20,000 crores.
Public sector banks require capital infusion to meet their capital adequacy norms. The government being the major stakeholder, provides them with the capital required.
Previously, the government issued bonds that would incur substantial interest costs.
However, now the government has decided to issue zero-coupon bonds to save interest costs.
What is a zero-coupon bond
As the name suggests, Zero-coupon bonds are a type of bond that do not make any periodic interest payments (coupons) during the bond’s life.
Instead, the investor buys the bond at a deep discount to its face value and then receives the face value of the bond when it matures, reflecting the fact that the investor is giving up all those periodic payments in return for the lump sum at maturity.
These bonds can be issued by the government and private & public companies.
How to invest in zero-coupon bonds in India?
Individuals can buy zero-coupon bonds in India through these platforms:
Through the trading members of NSE and BSE, individuals can buy a zero-coupon bond. Indian companies (public or private) and government-issued bonds can be purchased through the members.
Individuals have to open a Trading and Demat account to participate in zero-coupon bonds.
2. Online Platforms
If individuals want to buy zero-coupon bonds online, they can opt for online platforms.
There are various choices available to an individual in the case of online platforms.
BondsIndia is one of the most trusted online bonds platforms that provide easy access to various bonds, extensive research and a seamless process.
3. NSE and BSE Apps
Individuals can participate in government-issued zero-coupon bonds through NSE or BSE, mobile apps or a web-based app.
"NSE goBID" is the app of NSE, and the "BSE Direct" is the app of BSE.
To take part in non-competitive bidding (NCB), retail investors have to select a facilitator or an aggregator. They can place their bid using the NSE or BSE mobile app/web platform.
4. RBI Retail Direct Scheme
Individuals can also participate in government-issued zero-coupon bonds through the recently launched scheme by the RBI - RBI Retail Direct Scheme. For that, individuals will have to open a gilt account with the national banks.
Benefits of investing in zero-coupon bonds
Some of the benefits of investing in zero-coupon bonds are:
Zero-coupon bonds are exactly what they sound like – bonds that don't pay any interest until the bond matures. However, because the investor is buying the bond at a discount, the payment received at maturity is higher than if the investor had purchased a regular coupon bond.
Another benefit of Zero-coupon bonds is that they are less risky than other types of investments as there are no reinvestment risks. This is because no interest is received on these bonds, so the question of reinvesting does not come.
Zero-coupon bonds offer investors a higher yield than other bonds. This can be a good investment for some, but there are risks involved that investors are advised to consider before investing in these bonds.
One of the most significant risks with Zero-coupon bonds is interest rate risk. This is the risk that interest rates will move up and down, causing the value of the bond to fluctuate. If interest rates rise, the value of the bond will decrease, and vice versa.
Second, because there is no regular income stream from Zero-coupon bonds, they can be difficult to sell before maturity. Selling before maturity could mean selling it at a discount to its face value. This can reduce the overall return on investment.
Thus, it is recommended that investors look into all the factors before investing.
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