Bonds & Debt

G-Secs, SDLs, corporate bonds, debt MFs, and SGBs explained.

What are Bonds?

A bond is a loan you give to a government or corporation. In return, they pay you interest (coupon) periodically and return the principal (face value) at maturity. Bonds are debt instruments—safer than stocks but with lower returns.

Key Bond Terms

• Face Value: Principal amount (usually ₹1,000 or ₹10,000 per bond)
• Coupon Rate: Annual interest rate (e.g., 7% on ₹10,000 = ₹700/year)
• Maturity: When principal is repaid (1 year to 30+ years)
• Yield: Effective return considering current price (may differ from coupon if traded)

Types of Bonds in India

1. Government Securities (G-Secs)

Issued by the central government. Safest investment in India (backed by sovereign guarantee). Zero default risk.

• Returns: 7-7.5% typically (varies with RBI rates and duration)
• Maturity: Short-term (T-Bills: 91, 182, 364 days) to long-term (5, 10, 30 years)
• Liquidity: Can sell before maturity on secondary market (price fluctuates with interest rates)

2. State Development Loans (SDLs)

Issued by state governments. Slightly higher yield than G-Secs (extra 0.2-0.5%). Still very safe.

3. Corporate Bonds

Issued by companies to raise debt capital. Higher yield than G-Secs but with credit risk.

• AAA-rated: Safest corporate bonds, 7.5-9% yield
• AA-rated: Good quality, 8-10% yield
• Below AA: Higher risk, avoid unless you assess credit risk

Ratings by CRISIL, ICRA, CARE. Check before buying.

4. Sovereign Gold Bonds (SGBs)

Unique to India. Government securities denominated in grams of gold.

• Returns: Gold price appreciation + 2.5% annual interest
• Maturity: 8 years (can exit after 5 years on exchange)
• Tax: Capital gains tax-free if held to maturity
• Interest: Paid semi-annually, taxable as income

Alternative to physical gold—no storage issues, earns interest, tax benefits.

5. Tax-Free Bonds

Issued by government entities (NHAI, IRFC, etc.). Interest is tax-free under Section 10. Yield: 5-5.5% (lower because tax-free). Long maturity (10-20 years). Rare issuance—last big issuance was 2019-2020.

How to Buy Bonds

RBI Retail Direct (Best for G-Secs & SDLs)

Platform launched by RBI for retail investors to buy government securities directly. No intermediary, no charges.

1. Register on rbiretaildirect.org.in
2. Link bank account
3. Browse available G-Secs and SDLs
4. Buy in primary auctions or secondary market
5. Interest credited directly to bank account

Stock Exchanges (Corporate Bonds)

Listed corporate bonds trade on NSE/BSE. Buy through your broker's bond platform. Minimum investment often ₹10,000 - ₹1 lakh per bond.

Bond Platforms

GoldenPi, Wint Wealth, IndiaBonds—aggregators that list corporate bonds and G-Secs. Easier interface than direct exchange trading.

Debt Mutual Funds vs. Direct Bonds

Debt Mutual Funds

• Pros: Professional management, diversification, high liquidity, low entry (₹500)
• Cons: Expense ratio (0.5-1.5%), taxation as per slab

Direct Bonds

• Pros: Predictable returns (hold to maturity), no annual fees, you choose specific bonds
• Cons: Higher entry barrier (₹10,000+), less liquid, need to manage yourself

Interest Rate Risk

Bond prices and interest rates have an inverse relationship:

• When RBI raises rates: Existing bond prices fall (new bonds offer higher rates)
• When RBI cuts rates: Existing bond prices rise (your higher-coupon bonds become attractive)

If you hold to maturity, interest rate changes don't matter—you get promised coupon and principal. But if you sell before maturity, price fluctuation affects returns.

Duration

Duration measures bond's sensitivity to interest rate changes. Higher duration = more price volatility. Long-term bonds (10-30 years) have high duration, short-term bonds (1-3 years) have low duration.

Credit Risk

Risk that issuer defaults on payments (only for corporate bonds; G-Secs have zero credit risk).

• Check credit ratings before buying
• Diversify across issuers
• Avoid bonds below AA rating unless you're an expert

Taxation on Bonds

Interest income: Taxed as per your income slab (added to total income).

Capital gains (if sold before maturity):

• Listed bonds: LTCG (held > 12 months) at 10% without indexation, or slab with indexation
• Unlisted bonds: LTCG (held > 36 months) taxed as per slab with indexation benefit

SGBs: Interest taxable, but capital gains tax-free if held to 8-year maturity.

Tax-free bonds: Interest exempt under Section 10.

When to Invest in Bonds

Suitable For:

• Conservative investors seeking stable income
• Retirees needing regular cash flow
• Diversification (balance equity risk)
• Short-term goals (1-5 years) where equity is too risky

Not Suitable For:

• Long-term wealth creation (equity outperforms over 10+ years)
• Beating inflation by large margins (bonds barely beat inflation)
• High-income individuals (interest taxed at highest slab, reducing real returns)

Building a Bond Portfolio

Bond Ladder

Buy bonds maturing at different times (1, 3, 5, 7, 10 years). As each matures, reinvest in new long-term bonds. This averages interest rate risk and provides regular liquidity.

Allocation by Age

Common rule: Bond allocation % = Your age. At 30, hold 30% bonds / 70% equity. At 60, hold 60% bonds / 40% equity. Adjust based on risk tolerance.

Sample Conservative Portfolio (₹50 lakhs)

• ₹15 lakhs in G-Secs (5-10 year maturity) via RBI Retail Direct
• ₹10 lakhs in SGBs (gold exposure + interest)
• ₹10 lakhs in AAA corporate bonds (8-9% yield)
• ₹10 lakhs in debt mutual funds (liquid/short-duration)
• ₹5 lakhs in equity (small allocation for growth)

Educational Calculators

• Bond YTM Calculator
• Bond Duration Calculator
• PPF Calculator

Frequently asked questions

Are G-Secs safe for Indian investors?

Government securities carry sovereign credit risk — among the safest rupee instruments. Price still fluctuates with interest rate changes if sold before maturity.

Debt mutual funds vs FD — which is better?

FDs give fixed returns and DICGC insurance up to ₹5 lakh per bank. Debt funds offer flexibility and potential tax efficiency for long holding periods but carry NAV volatility.

What are Sovereign Gold Bonds?

RBI-issued paper gold with 2.5% annual interest and tax-free capital gains at maturity. Listed on exchanges after issuance period.