Investment in bonds, in general, comes with a host of benefits, including portfolio diversification and low volatility. Moreover, you get to choose from numerous types of bonds, such as corporate, government, PSU, convertible, and the most recent addition - green bonds.
India joined the green bond group in early 2023 when the first bond was issued for $2 billion. The funds will be directed towards projects that contribute to environmental protection, net zero objectives, conservation of resources, and more.
If you are looking to invest in the green bond market, understanding the key features, benefits, cons, and more is crucial. This enables you to make informed decisions that align with your current and future goals.
Read on to learn the green bonds' meaning, how it works, their benefits, the investment process and more.
Green bonds issued in India and everywhere else are similar to the bonds that you conventionally find. You get interest on the principal (face value), invest in the bond till the end of the tenor and get the principal back after the term ends.
The key difference is that the funds raised have to be utilized towards environmental-friendly financing projects. These bonds invest in climate solutions, thereby helping contribute towards climate change mitigation. Data reveals that green bonds have raised approximately $2.5 trillion on a global basis to support sustainable and green projects.
Various entities, such as corporations, governments, and others, can issue these bonds to raise funds for their expenses. The projects can include those that focus on renewable energy, green housing, pollution control, and other eco-friendly matters.
Listed below are some of the top features of green bonds:
Provides funds for positive environmental impact, allowing investors to be socially responsible for being a part of the change
Fixed income generating debt instrument, enabling investors to earn stable returns
Low risk due to the low volatility of the debt market, ensuring the security of funds
Tax benefits on the interest earned, maximizing the returns of the investor
Transparency in reporting of fund management and its impact
As of now, there are three types of green bonds in India, as mentioned below:
Issued by sovereign entities, these bonds come with tax benefits and a longer tenor. The funds from these bonds go towards the environment-focused projects and goals of the government.
Also known as covered bonds, these have dual recourse. This means that if the issuer defaults on the payments, investors have recourse to both the covered pool and the issuer.
As the name suggests, the backing of these bonds comes from an asset as collateral. The assets are generally those that generate cash flow from the debt (raised funds).
Along with knowing the features, green bond benefits and drawbacks are crucial aspects you need to be aware of:
Some of the advantages of green bonds include the following:
● Be a part of a project focused on creating a positive environmental impact
● Earn fixed income on the principal until the end of the tenor
● Enjoy low volatility and low risk, ensuring the security of the funds
Here are the disadvantages of green bonds you need to know:
● Longer duration as green projects generally take a long term for completion
● Low returns compared to other debt and equity instruments
Along with considering the features and pros and cons of green bonds, consider the following aspects before you invest:
Assess your investment horizon, as green bonds are generally long-term
Evaluate the interest payout against your needs to ensure they align
Check the credibility of the issuer and the project to ensure security
Consider the investment purpose, as these are long-term, fixed-income instruments
Now that you know green bond benefits, purpose, and other crucial information, remember to invest as per your preference and risk. Compare different options to ensure that you choose the one that’s best for you. Remember to diversify your portfolio to mitigate risk and protect your investment.
On Bajaj Markets, you can invest in bonds or other avenues online within minutes. With an entirely digital investment process, you can invest in your preferred instrument whenever and from wherever you want.
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Green bonds issued in India work the same way as other bonds. The key difference here is that the funds raised should be utilized towards the purpose of leaving a positive impact on the environment.
Green bonds are treated like a regular bond and have no tax benefit in India yet
Some of the more notable green bond benefits range from portfolio diversification and tax benefits to fixed income and low risk. Green bonds also help protect the environment. So, if you are looking for these benefits from your investment, you can invest in green bonds.