What Are PSU Bonds

Many of us often choose to invest in bonds to diversify our portfolio holdings. In India, investors can choose between PSU bonds, corporate bonds and government bonds to grow their corpus. While private companies issue corporate bonds, the GOI issues government bonds. However, PSU bonds differ significantly from the bonds mentioned above.

What Are PSU Bonds?

PSU (Public Sector Undertaking) bonds are debt securities or bonds that public sector undertakings issue. The Central or State Government usually holds more than 51% share in these bonds. 

The PSUs issue these bonds to raise funds for their projects. These bonds have a medium to long-term maturity tenure, usually ranging between 5 to 10 years. The PSUs pay interest to investors periodically, such as semi-annually or annually and return the principal on maturity.

Investors can purchase PSU bonds in the primary issuance market or in the secondary market and store them in demat accounts. These bonds are easily transferable and tradable in the stock exchanges, ensuring liquidity to investors.

Investors can check the credit rating of these bonds before purchasing to ensure that their investment objective aligns with the interest payment, security and maturity tenure. 

Key Features of PSU Bonds

Here are the key features that elaborates on what are PSU bonds:

• Liquidity: PSU bonds have easy liquidity as they can be traded and transferred seamlessly in the secondary market. 
• Safety: As government-owned entities issue these bonds, they are relatively safer than high-yield bonds.
• Tenure: PSU bonds have tenure between 5 years to 15 years usually fostering long-term investments.
• High Credit Rating: PSU bonds usually have a high credit rating due to the underlying security. 

Advantages of Investing in PSU Bonds 

Here are the advantages of PSU bonds that you need to know: 

Low Risk

PSU bonds are secured and safe investment options as they are backed by government-owned entities. The chance of a government entity defaulting on maturity payment is negligible, making PSU bonds a low-risk investment.

Regular Income

Regular or senior citizen investors can earn income periodically from PSU bond interest payout. These bonds pay interest bi-annually or annually to all investors.

Long-term Investment Value

PSU bonds usually have a maturity period of more than 5 years. As a result, you can stay invested for the long term without the hassle of reinvestment after a few years. However, if you want to liquidate your holdings, you can seamlessly trade them at the stock exchanges.

How Do PSU Bonds Work?

PSU bonds are a type of loan wherein investors lend money to the issuer of the bond. Usually, public sector banks or entities issue PSU bonds and pay interest to the investors at regular intervals. 

The issuing authority further returns the principal to the investor at the end of the maturity period. PSU units use the funds collected for public sector projects to meet financial deficits. 

Types of PSU Bonds

Now that you know what are PSU bonds, let us find out their types:

Fixed Rate Bonds

The interest rate of these PSU bonds remains unchanged for the entire tenure. Investors can thus enjoy stable returns, ensuring predictable financial planning. The issuing authority declares the interest rate at the time of bond issuance. 

Floating Rate Bonds

In this type of bond, the interest rate fluctuates based on market rates. As a result, investors can enjoy higher interest rates when the market rates increase. 

Inflation-Indexed Bonds

The principal amount and the interest are linked to the Consumer Price Index (CPI). As a result, changes in the CPI result in changes in the interest and principal amount. A rise in the CPI results in an increase in the interest and the principal ensures a hedge against inflation in the economy. 

Zero-Coupon Bonds

These bonds do not offer an interest or coupon; rather the investors can purchase these bonds at a discounted price compared to the face value. However, on maturity, investors receive the actual face value. 

Bonds with Call and Put Option

Bonds with a call option indicate the issuer can buy back the bond before maturity. On the flip side, bonds with a put option refer to the ability of investors to sell the bond before the maturity date. 

Tax-Free Bonds

Interest and capital gains from bonds are taxable. However, tax-free bonds are certain bonds whose interest earnings are not subject to taxation. These types of bonds are suitable for individuals who fall into high-income brackets. 

Best PSU Bonds for Your Investment

Here are some of the entities in India that issue PSU bonds:

• National Thermal Power Corporation (NTPC)
• Steel Authority of India Limited (SAIL)
• Oil and Natural Gas Corporation (ONGC)
• Export-Import Bank of India (EXIM)
• National Bank for Agriculture and Rural Development (NABARD)
• Rural Electrification Corporation Limited (REC)
• National Highways Authority of India (NHAI)

How to Invest in PSU Bonds?

Investors can purchase PSU bonds directly by participating in public issues that PSUs offer. They can further purchase these bonds by participating in IPOs (initial public offering). Alternatively, investors can purchase PSU bonds by trading in the secondary market on Indian stock exchanges.

Who Should Invest in PSU Bonds?

Here are the categories of investors who can consider investing in PSU bonds:

1. High-Income Taxpayers

Certain PSU bonds provide tax-free interest to investors. High-income taxpayers can invest in these bonds to save tax on their interest income from PSU bond investments. 

2. Risk-Averse Investors

As PSU bonds are low-risk and safe investment instruments due to government ownership, conservative and risk-averse investors can consider investing in these bonds.

3. Investors Looking for a Diversified Portfolio

If you are an investor looking for portfolio diversification, you can invest in PSU bonds to balance the risk associated with other equity-related investments in your portfolio.

4. Extended Investment Horizon

The maturity tenure of PSU bonds is 5 years to 15 years usually. If you are an investor with long-term investment objectives and financial goals, you can purchase PSU bonds. 

How to Identify the Best PSU Bonds for Your Investment?

Here are the ways to identify the best PSU binds:

• Ensure you check the credit rating by rating agencies like CRISIL, CARE, ICRA and others to evaluate the creditworthiness of the bond.
• Check the financial health and records of the issuing authority.
• Ensure to compare the interest rates.
• Check if your investment goals align with the bond’s maturity tenure and interest payable options (not intervals).
• Evaluate the purpose of issuing the bond and the concerned PSU unit's prospects.

Differences Between PSU Bonds and Bonds Issued by Private Sector Companies

The table below illustrates the differences between PSU bonds and bonds issued by private sector companies:

Final Word

To elaborate on what are PSU bonds, these are secured investment options for low-risk investors. Investing in PSU bonds helps diversify the portfolio through long-term investments. Investors can purchase these bonds in the primary issuance or in the secondary market. Easy tradability and transferability make these bonds a liquid investment option.