Bonds Vs Debentures - What’s the Difference and What’s Better for Your Portfolio?
The Indian financial markets offer ample choice for investors with different risk profiles. Bonds and debentures are two options for those seeking to invest in low-risk instruments. Though they are debt securities, they are different from each other in several aspects. What are these, and what should be your pick? Let’s find out.
What are bonds?
Bonds are financial instruments issued by the government, corporations or other entities to raise capital. Bonds are loans you extend upon which you get an interest, known as a coupon rate. Bonds are typically secured by specific assets, offering an additional layer of security. Investing in bonds allows you to earn a regular income through interest payments. Upon maturity, you get back the principal amount.
What are debentures?
Debentures, too, are debt instruments issued by companies or governments to raise funds. Debentures also pay periodic interest on the borrowed amount, but unlike bonds, they are not secured. This means they are not backed by physical assets or collateral and rely on the issuer's creditworthiness and reputation. As they are unsecured, they tend to offer higher interest rates than bonds.
Debenture vs bond: Key differences
The table captures key differences between debentures and bonds on various parameters:
| Parameter | Debenture | Bond |
|---|---|---|
Security | Unsecured | Secured |
Issuer | Mostly corporations | Government and corporations |
Risk | Higher as it is unsecured | Lower as backed by collateral |
Interest rates offered | Higher | Lower |
Liquidity | Less liquid and can be difficult to sell | More liquid and can be easily traded |
Default recovery | Difficult due to lack of collateral | Relatively easy as backed by collateral |
Bonds or debentures: What should you choose?
These factors should guide your choice between bonds and debentures:
- Risk appetite
Risk appetite refers to your ability to stomach risks. In other words, it refers to your risk-taking ability. If you have a higher risk tolerance, you can opt for debentures. On the other hand, if you prefer high safety and stability, you can opt for bonds, especially government bonds.
- Returns
You can opt for debentures if you seek high returns from your debt financial instruments. Corporate debentures generally offer higher returns to compensate for the lack of collateral. On the other hand, if you want to play safe and are willing to sacrifice returns for it, you can opt for bonds.
- Investment horizon
This is another vital consideration. If you want to remain invested for a relatively longer period and earn stable returns, you can opt for bonds. On the other hand, debentures are a prudent investment choice if you are looking for a short-term investment option.
Wrapping it Up
Bonds and debentures play distinct roles in an investor’s portfolio. While bonds offer stable returns and are ideal for investors with a conservative outlook, debentures are more suited for those looking for higher returns. That said, before investing in bonds (particularly those issued by non-government organisations) or debentures, it is essential to conduct due diligence on the issuing entity and evaluate its credit rating before investing.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
