To many people, investing in a bond means something out of their financial limits. This is because of the belief that bonds require a huge minimum investment to be made, and only big mutual fund houses, or high net worth individuals invest in them. While there are limits on minimum investments for bonds, are there any bonds that are useful investment options for small investors?
Yes, there are. This option is called a Savings Bond.
What is a Savings Bond?
A Savings Bond is a bond where the limits for investment are set low so that people can invest easily. Instead of a high limit for entry, the Savings Bond has a low entry threshold to make it affordable to anyone who wants to invest and earn income from such bonds.
In India, the Government introduced an 8% Savings Bond in 2003 and replaced it with a 7.75% bond in 2018. The minimum investment required for this bond is Rs. 1,000 which makes it affordable for many investors. The investment can be increased in multiples of Rs. 1000, to make it simpler for people to increase their investment.
Now that we have discussed the Savings Bond definition, let us examine the features.
Features of the Savings Bond:
- The bond is open for investment to all resident individuals, and Hindu Undivided Families. This means Non-Resident Indians cannot invest in it.
- You can apply online or offline for the bonds. Several banks provide this investment facility in their branches. You can download a form online, or take a form from one of their branches, fill it up and the banks will process the investment.
- The Savings Bond is issued in a Demat form. It is credited to the Bond Ledger Account of the investor. The bank gives a certificate of holding to the investor as proof of the investment.
- The interest on the Savings Bond is payable every six months. For investors looking for capital appreciation, there is a cumulative option where the interest will be reinvested and will accumulate. The redemption value of a Rs. 1,000 bonds will be Rs. 1,703.
- The redemption period for these bonds are 7 years. However, a premature exit is allowed for people of age above 60 years.
- These bonds are not transferrable to another person. They cannot be used as collaterals for loans.
- The interest earned on these bonds is taxable. It is taxed similar to interest on Fixed Deposits.
So, now that you know the Savings Bond meaning, you can take a decision to invest in them. These bonds can be subscribed at any time, which makes them an attractive mode of investment for some funds that are lying idle. Since the minimum threshold is low, it opens up the bond as in investment mode. Invest in theSavings Bondand earn from your funds today!
Looking to invest in a Savings Bond? Approach your nearestHDFC Bank Branchto know more!
Know more about the different factors to consider when making aninvestmentnow!
* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action.
FAQs
Key takeaways
A savings bond is a low-risk way to save money, which is issued by the Treasury and backed by the U.S. government. Savings bonds pay interest only when they're redeemed by the owner, and they earn interest for as long as 30 years.
What is the benefit of U.S. Savings Bonds? ›
Tax advantages.
You pay no state or local taxes on the interest on the bonds, and you can defer paying federal taxes on the interest until you cash in the bond or until it matures.
What is a savings bond quizlet? ›
Savings Bond. low-denomination bond issued by the United States government. Municipal Bond. a bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks and schools.
What is a bond and its features? ›
Bond is a fixed-income instrument that represents a loan from an investor to a borrower. It is a contract between the investor and the borrower, where the borrower uses the money to fund its operation and the investors receive interest on the investment.
What is bond and its features? ›
Bonds are a popular form of investment because they offer regular income, capital preservation, and diversification benefits. It is a loan agreement between a borrower and a lender.
How to cash out savings bonds? ›
You can cash paper bonds at a bank or through the U.S. Department of the Treasury's TreasuryDirect website. Not all banks offer the service, and many only provide it if you are an account holder, according to a NerdWallet analysis of the 20 largest U.S. banks.
Should I cash out my savings bonds? ›
It's possible to redeem a savings bond as soon as one year after it's purchased, but it's usually wise to wait at least five years so you don't lose the last three months of interest when you cash it in.
What is a savings bond in simple terms? ›
When you buy a U.S. savings bond, you lend money to the U.S. government. In turn, the government agrees to pay that much money back later - plus additional money (interest).
How do you explain a savings bond? ›
A U.S. savings bond is a government bond offered to its citizens to help fund federal spending, and which provides savers with a guaranteed, although modest, return. These bonds are issued with zero coupon at a discount with an implied fixed rate of interest over a fixed period of time.
What are savings bonds examples? ›
The U.S. Department of the Treasury currently sells two types of savings bonds, the EE and I series. Both series have different interest rates, which are either fixed or change with inflation. Learn more about EE bonds and I bonds, including how to: Buy and redeem them.
These are the risks of holding bonds: Risk #1: When interest rates fall, bond prices rise. Risk #2: Having to reinvest proceeds at a lower rate than what the funds were previously earning. Risk #3: When inflation increases dramatically, bonds can have a negative rate of return.
Are bonds good or bad? ›
Historically, bonds are less volatile than stocks.
Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.
Which of the following are features of bonds? ›
Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability. Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk. Most bonds come with ratings that describe their investment grade.
What are the features of bonds face value? ›
Face value and bonds
A bond's face value is the amount the issuer provides to the bondholder, once maturity is reached. A bond may either have an additional interest rate, or the profit may be based solely on the increase from a below-par original issue price and the face value at maturity.
