Last Updated on December 28, 2023 by BFSLTeam BFSLTeam
Bonds are one of the many financial securities you can currently invest in India. Since they’re considered as debt instruments, the issuing entity is legally obligated to repay the amount borrowed from investors at the end of a specified tenure. In addition to this, the issuing entity is also obligated to pay interest regularly on the amount borrowed from the investors till the end of the tenure. As a prospective bond investor, it may not be enough to just know what bonds are. In fact, to make a well-informed investment decision, it is crucial to be aware of who can buy bonds as well as how their investment decisions can impact the prices.
Who Can Buy Bonds?
Bonds are often purchased by two categories of investors – retail investors and institutional investors. Here’s a closer look at each of these investor categories.
Retail Investors
Retail investors are a category of small-scale non-professional investors who typically invest in bonds for their own personal financial objectives. Retail investors can be sub-classified into three major types – individuals, Hindu Undivided Families (HUFs) and High Networth Individuals (HNIs).
Since retail investors often don’t have access to large capital, their actions rarely impact the market significantly. That said, there have been instances where the collective action of retail investors has managed to move bond prices. Also, many retail investors lack the knowledge and in-depth understanding of the various market concepts to make calculated and precise investment decisions.
Additional Read: Different Types of Bonds
Institutional Investors
Institutional investors are the other category of investors who can buy bonds in India. They are entities or organisations that invest and trade in bonds on a more professional level. Unlike retail investors who tend to use their own money, most institutional investors typically don’t use their own funds.
Instead, they pool funds from other smaller investors, including retail investors, and invest them in bonds. That said, there are a few institutional investors who use their own funds as well to further their financial objectives. Since institutional investors generally invest vast sums of money in the market, they have the power to impact bond prices significantly. In fact, even a single institutional investor can move the market through their trading activity.
Institutional investors can be sub-classified into further categories. Here’s a quick look at a few examples.
- Asset Management Companies (AMCs)
- Mutual funds
- Banks and financial institutions
- Pension funds
- Insurance companies
- Investment banks
- Hedge funds
- Private Equity (PE) firms
- Venture Capital (VC) firms
Additional Read: Open Demat Account for Minors
One of the major advantages that institutional investors have over retail investors is the vast array of resources. These investors employ dedicated teams of experienced professionals who constantly monitor the markets and make well-informed investment decisions after conducting extensive research and analysis. They use extensively formulated bond investment and trading strategies, which often tend to be slightly more aggressive than what is typically used by retail investors.
With this, you must now know who buys bonds. Contrary to popular opinion, individual investors are not the dominating force in the bond market. In fact, they make up only a small part of the total bond trading volume. Instead, it is the institutional investors who extensively purchase and sell bonds both on the primary and secondary markets.
That said, the participation from retail investors has shot up significantly in recent years. The advent of online trading and the efforts of the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (RBI) to set up a dedicated bond investment portal for retail investors are a couple of the reasons for this newfound popularity of bonds among retail investors.
Conclusion
Bonds are generally regarded as safer and less volatile instruments that provide a consistent stream of income. This makes them perfect for diversifying and reducing the risk of an investment portfolio.
One of the many advantages of bonds is that they’re ideal for all kinds of investors. For instance, aggressive investors with a penchant for high-risk investments can consider investing in high-yield bonds with less-than-ideal credit ratings.
On the other hand, investors with a more moderate risk tolerance can consider investing in highly rated bonds. These instruments offer better safety and attractive returns. Finally, conservative investors can invest in government bonds, which offer low returns but are completely free from default risk.
