If you are continuously searching for different types of investments to diversify your portfolio, bonds and debentures can be excellent options. Both are debt instruments that provide good returns. These instruments seem similar initially, but you must understand the subtle difference between bond and debenture to make the right decision.
Understanding bonds
Bonds are secured debt instruments issued by governments, government companies, and large corporations. In simple words, it's a promissory note through which you lend a sum of money to the issuer and the issuer promises to repay it at a certain maturity date. Each bond has a fixed interest rate called a coupon rate. Bonds have a fixed timeline of interest payments. Bonds are secured by the issuer's assets, making them low-risk investment options.
You can invest in various types of bonds, such as
- Fixed Rate Bonds
- Floating Rate Bonds
- Zero-Coupon Bonds
- Callable Bonds
- Non-callable Bonds
- Government Bonds
- Corporate Bonds
Understanding debentures
A debenture is a debt instrument issued by companies to raise funds for expansion or funding specific projects. Debentures have fixed or floating interest rates and you receive interest payments periodically. They can be secured or unsecured depending on the issuer. Unsecured debentures are riskier because they are generally not secured by the issuer's assets. You must rely on the creditworthiness of the issuer.
There are multiple types of debentures such as:
- Secured Debentures
- Unsecured Debentures
- Convertible Debentures
- Non-convertible Debentures
Key differences between debentures vs bonds
| Point |
Debentures |
Bonds |
| Meaning |
Debentures are debt instruments issued by companies to raise funds for expansion or other projects |
Bonds are debt instruments by companies, governments, or municipalities to raise funds |
| Tenure |
Debentures generally have a longer-term |
Generally issued for a shorter term |
| Owner |
Owners are known as 'debenture holders'. |
Owners are called 'bond holders'. |
| Risks Involved |
Higher risk as they may not be backed by collateral (except for secured bonds) |
Lower credit risk, especially on government bonds. |
| Collateral |
Generally unsecured (no collateral), except for secured bonds |
Often secured by specific assets or government guarantees |
| Interest Rate |
Usually offers higher interest rates to compensate for higher risk |
May offer lower interest rates, especially for government bonds, due to lower risk |
Also Read: What is a Government Security & how to invest in G-Sec Bonds?
Conclusion
Bonds and debentures both serve as tools for raising capital. They cater to different risk appetites and financial goals. You must understand the differences between bonds and debentures to decide wisely. Debentures often offer higher returns but come with increased risks, making them suitable for investors seeking growth with a tolerance for volatility. On the other hand, bonds, particularly government bonds, provide stability and lower risk, appealing to conservative investors.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
