What are Bonds? A Complete Guide to Bond Investing in India
While stocks get most of the attention, bonds form the backbone of a well-diversified portfolio. They offer steady income, capital preservation, and lower volatility compared to equities. Let's understand how bonds work and how you can invest in them in India.
What is a Bond?
A bond is essentially a loan you give to an entity - either the government or a corporation. In return, the issuer promises to:
- Pay you regular interest (called coupon payments)
- Return your principal (face value) at maturity
When you buy a bond, you become a creditor to the issuer. Unlike stocks where you own a piece of the company, bonds make you a lender with a contractual right to receive payments.
Key Bond Terminology
| Term | Meaning |
|---|---|
| Face Value | The principal amount; typically Rs 1,000 or Rs 1 lakh per bond |
| Coupon Rate | Annual interest rate paid on the face value |
| Maturity Date | When the principal is repaid |
| Yield | Actual return considering current price and coupon |
| Credit Rating | Assessment of issuer's ability to repay (AAA, AA, A, BBB, etc.) |
Types of Bonds in India
1. Government Bonds (G-Secs)
Issued by the central or state governments. These are the safest bonds as they carry sovereign guarantee.
| Type | Features |
|---|---|
| Treasury Bills | Short-term (91, 182, 364 days); sold at discount |
| Dated G-Secs | Long-term (5-40 years); pay periodic interest |
| State Development Loans | Issued by state governments |
| Floating Rate Bonds | Interest rate linked to benchmark rate |
Current Yield (2025): 10-year government bond yields around 6.49%
2. Corporate Bonds
Issued by companies to raise capital. They offer higher returns than G-Secs but carry credit risk.
- Secured Bonds - Backed by company assets
- Unsecured Bonds/Debentures - No specific collateral
- Convertible Bonds - Can be converted to equity shares
Typical Yields: 8-14% depending on credit rating and company profile
3. PSU Bonds
Issued by Public Sector Undertakings like NTPC, Power Finance Corporation, Indian Railway Finance Corporation. They combine relatively higher safety with better returns than pure G-Secs.
Typical Yields: 7.5-9%
4. Tax-Free Bonds
Issued by government-backed entities (NHAI, REC, PFC, etc.). Interest earned is completely tax-free, making them attractive for high-tax-bracket investors.
5. Sovereign Gold Bonds (SGBs)
Government bonds denominated in grams of gold, offering 2.5% annual interest plus gold price appreciation. Tax-free capital gains at maturity.
Bond Yields in India (2025)
| Bond Type | Typical Yield | Risk Level |
|---|---|---|
| Government Securities | 6.5-7.5% | Lowest |
| AAA Corporate Bonds | 7.5-9% | Low |
| AA Corporate Bonds | 9-11% | Moderate |
| A and Below | 11-15% | Higher |
How to Invest in Bonds in India
1. RBI Retail Direct
Open a Retail Direct Gilt Account with RBI to buy government securities directly in primary auctions or secondary market. No intermediary fees.
2. Stock Exchanges (NSE/BSE)
Buy listed bonds through your regular trading account. Requires demat account.
3. Online Bond Platforms
Platforms like Wint Wealth, GoldenPi, BondBazaar offer access to corporate and government bonds with transparent pricing.
4. Debt Mutual Funds
Invest in bond portfolios through mutual funds without buying individual bonds. Offers diversification and professional management.
Understanding Bond Risks
1. Credit Risk (Default Risk)
Risk that the issuer fails to pay interest or principal. Higher for lower-rated bonds. Always check credit ratings from CRISIL, ICRA, or CARE.
2. Interest Rate Risk
When interest rates rise, existing bond prices fall (and vice versa). Longer-tenure bonds are more sensitive to rate changes.
3. Liquidity Risk
Some bonds may be difficult to sell before maturity without accepting a discount.
4. Inflation Risk
If inflation exceeds your bond's interest rate, your real returns become negative.
Bond Credit Ratings Explained
| Rating | Meaning | Investment Grade? |
|---|---|---|
| AAA | Highest safety | Yes |
| AA | High safety | Yes |
| A | Adequate safety | Yes |
| BBB | Moderate safety | Yes |
| BB and below | Speculative grade | No (Junk) |
Bonds vs Fixed Deposits
| Feature | Bonds | Fixed Deposits |
|---|---|---|
| Returns | Generally higher | Fixed, lower |
| Liquidity | Can be traded (if listed) | Premature withdrawal penalty |
| Capital Gains | Possible if rates fall | Not applicable |
| DICGC Insurance | No (except bank bonds) | Yes (up to Rs 5 lakh) |
Who Should Invest in Bonds?
- Conservative investors seeking steady income
- Retirees needing regular cash flow
- Portfolio diversifiers wanting to reduce equity volatility
- High-tax-bracket investors (for tax-free bonds)
- Those with specific financial goals matching bond tenures
Diversify Beyond Bonds with Mutual Funds
While bonds offer stability, a diversified portfolio typically includes equity mutual funds for growth. At DhanLAP, we help you leverage your mutual fund investments through Loan Against Mutual Funds (LAMF).
Benefits include:
- Access liquidity without selling - Keep earning returns
- Competitive interest rates - Often better than corporate bond yields
- Quick processing - Funds when you need them
- Flexible repayment - Pay interest only option available
Final Thoughts
Bonds are an essential component of a balanced investment portfolio. Government bonds offer safety, while corporate bonds provide higher yields with proportionate risk. For most investors, starting with AAA or AA-rated bonds or government securities is prudent. As you gain experience, you can explore higher-yield options with appropriate risk management.
Remember: Higher yield always means higher risk. Always check credit ratings and understand the issuer before investing.
