What Are Bonds? Meaning, Types, Risks & How to Invest in India

Introduction 

In 2025, when equity markets remain volatile and inflation worries keep investors cautious, bonds continue to stand out as a safe and stable investment avenue. They offer predictable income, diversify portfolios, and balance risk exposure, especially for conservative investors. For anyone asking what are bonds and why they matter today, the answer lies in their ability to generate steady returns while protecting capital.

This article explains bonds in detail—covering their meaning, types, key terms, associated risks, and most importantly, how to invest in bonds in India step by step. Whether you are a first-time investor seeking stability or an experienced market participant looking to diversify, this guide will help you understand where bonds fit in your financial strategy.

What Are Bonds? – Meaning & Basics

A bond is essentially a loan given by an investor to a borrower—typically a government, public sector enterprise, or corporation. In return, the issuer promises to pay periodic interest (called coupon) and return the principal amount on maturity.

Unlike equities, which represent ownership in a company, bonds represent debt. Equity returns are uncertain and depend on profits and growth, while bond returns are contractual, offering fixed payments at predetermined intervals.

How bonds work:

• Issuer (borrower): Government or company raising money.
• Investor (lender): Purchases the bond, thus lending funds.
• Coupon: Regular interest payment (e.g., 7% annually).
• Maturity: Repayment of the principal at the end of the bond term.

Think of bonds as lending money to the government or a blue-chip company like NHAI or REC. In exchange, you receive periodic interest—similar to fixed rent on a leased property—and get back your initial money when the contract ends.

This predictable structure is what makes bonds a cornerstone of any balanced investment portfolio.

Key Terms You Must Know

Understanding bonds requires familiarity with certain financial terms:

• Coupon Rate: Annual interest rate paid on the bond.
• Face Value (Par Value): The principal amount, usually ₹1,000 or ₹10,000.
• Maturity: The date when the bond is redeemed.
• Yield: Return earned; Current Yield = Annual coupon ÷ Price. Yield to Maturity (YTM) considers the full return if held to maturity.
• Credit Rating: Issuer’s creditworthiness (AAA = highest safety).
• Duration & Interest Rate Sensitivity: Measure of price volatility with interest rate changes.
• Call & Put Features: Option for issuer (call) or investor (put) to redeem early.
• Risks: Credit, inflation, reinvestment, and liquidity risks.

Quick Reference Table

Types of Bonds in India

In India, bonds come in several forms, each serving different investor needs:

• Government Bonds (G-Secs): Issued by RBI, considered safest. Includes Sovereign Gold Bonds and RBI Savings Bonds.
• Corporate Bonds: Issued by companies, ranging from highly rated (AAA PSU bonds like REC, NHAI) to lower-rated high-yield bonds.
• Municipal Bonds: Issued by local bodies for infrastructure projects.
• Zero-Coupon Bonds: Issued at discount, redeemed at face value (no periodic interest).
• Convertible Bonds: Can be converted into equity at a later date.
• Tax-Free Bonds: Issued by PSUs like NHAI or PFC, interest is tax-exempt.
• Inflation-Linked Bonds: Adjust returns based on inflation index, protecting real returns.

Government and PSU bonds dominate in India due to strong creditworthiness, while retail investors increasingly explore tax-free and RBI Retail Direct G-Secs for stability.

Advantages & Risks of Bonds 

Advantages

• Steady fixed income
• Portfolio stability
• Diversification from equities
• Tax-free options available
• Predictable returns

Risks

• Credit default risk
• Interest rate fluctuations
• Inflation eroding returns
• Limited liquidity in secondary markets

How to Invest in Bonds in India

Retail investors today have multiple channels to access bonds. Here’s a step-by-step guide on how to invest in bonds in India:

1. Primary Market: Buy directly during bond issues—through RBI auctions (RBI Retail Direct) or corporate bond IPOs.
2. Secondary Market: Trade listed bonds on NSE/BSE, or through OTC dealers and brokers like Samco.
3. Bond Funds & ETFs: For diversification, invest in mutual funds or ETFs that track government or corporate bonds.
4. Requirements: A Demat account, KYC compliance, and minimum investment (₹10,000–₹1,00,000 depending on issue).
5. Factors to Check Before Investing:
   • Issuer credibility and credit rating
   • Coupon and yield vs alternatives like FDs
   • Maturity period aligning with financial goals
   • Liquidity in secondary market

Government and AAA-rated PSU bonds suit conservative investors. Risk-tolerant investors may explore higher-yield corporate bonds, but due diligence on creditworthiness is crucial.

Building a Bond Portfolio / Strategy

Bonds play a stabilizing role in any portfolio. Allocation depends on risk appetite:

• Conservative investors: Higher exposure to G-Secs, tax-free bonds, and RBI instruments.
• Aggressive investors: Blend of corporate bonds and short-term high-yield options.

Bond Laddering Strategy: Invest in bonds with staggered maturities (e.g., 2, 5, 10 years). This provides liquidity, reduces reinvestment risk, and balances yield.

Analyst note: A well-designed bond ladder cushions against interest rate cycles, ensuring steady cash flows across different maturities.

Taxes & Regulations in India

Interest Income: Taxed as per investor’s income slab.

TDS: Deducted if applicable on corporate bonds.

Capital Gains:

• Short-term (<36 months): Taxed as per slab.
• Long-term (>36 months): 10% without indexation or 20% with indexation.

Regulators: RBI governs G-Secs, SEBI oversees bond markets, and credit rating agencies provide risk assessment.

Case Study / Example

Suppose you buy a ₹10,000 bond at 7% coupon for 10 years:

• Annual interest = ₹700 (credited annually/semi-annually).
• At maturity, you receive ₹10,000 principal + total interest earned.

If sold before maturity in secondary markets, price may be higher or lower depending on prevailing interest rates.

Comparison with FD: FDs lock money but usually don’t offer secondary market liquidity. Bonds, however, can be traded, offering more flexibility while still paying predictable returns.

FAQs

Are bonds safe in India?
Government bonds and AAA-rated PSU bonds are considered safest. Corporate bonds carry higher risk depending on the issuer.

Can I sell a bond before maturity?
Yes, listed bonds can be sold in secondary markets, though liquidity may vary.

What is the difference between bond yield and coupon rate?
Coupon is fixed interest on face value, while yield reflects actual return based on bond price.