Investing in bonds

A bond is a debt instrument that represents a loan from an investor to an issuer. Its returns may include periodic coupon payments and repayment of the face value at maturity.

• Governments, municipalities, companies and financial institutions can issue bonds.
• The coupon rate determines the interest payable on the bond’s face value.
• The maturity date indicates when the principal is due for repayment.
• Bond prices generally fall when market interest rates rise, and increase when rates fall.
• Government bonds usually have lower credit risk than corporate bonds.
• Corporate bonds may offer higher yields, depending on the issuer’s creditworthiness.
• Bonds are exposed to interest rate, credit, liquidity, inflation and reinvestment risks.

• You can invest through brokers, recognised bond platforms or the RBI Retail Direct platform, depending on the bond.

  
  
  

Bonds have defined terms that determine how much income you may receive, when your principal is due and the risks involved.

• Fixed or specified interest payments: Many bonds pay interest at a predetermined coupon rate. Payments may be made annually, half-yearly or at another frequency specified in the issue terms.
• Maturity date: Each bond has a maturity date on which the issuer is expected to repay its face value. Bond tenures may range from a few months to several years.
• Face value: This is the amount that the issuer agrees to repay at maturity. Interest is generally calculated on this amount.
• Credit rating: Credit rating agencies assess an issuer’s capacity to meet its payment obligations. A higher rating generally indicates lower credit risk, but it does not eliminate the possibility of default.
• Market price: A listed bond can trade above, below or at its face value. Its price may change because of interest rates, credit developments, demand and liquidity.
   

When you purchase a bond, you lend money to its issuer for a specified period. The issuer agrees to pay interest according to the bond’s terms and return the principal on maturity.

Suppose you buy a bond with the following terms:

• Face value: ₹10,000
• Coupon rate: 7% per year
• Maturity: 5 years
• Interest frequency: Annual

The bond would pay ₹700 annually, subject to the issuer meeting its obligations. At the end of 5 years, the issuer would repay the ₹10,000 face value.

You may also sell a listed bond before maturity. However, the price you receive could be higher or lower than the amount you originally invested.

Bonds may support income generation, capital preservation and portfolio diversification. Their suitability depends on the bond’s credit quality, maturity, liquidity and the investor’s financial position.

• Predictable income: Fixed-coupon bonds specify their interest rate and payment schedule in advance. However, payments remain subject to the issuer’s ability to meet its obligations.
• Diversification: Bonds may behave differently from equities during certain market conditions. Holding both asset classes can help distribute portfolio risk, although diversification cannot prevent losses.
• Capital preservation: High-quality bonds held until maturity may provide greater predictability than equities. Principal repayment is still subject to credit risk unless the security carries a sovereign guarantee.
• Range of risk levels: Different types of bonds such as government securities, investment-grade corporate bonds and lower-rated bonds carry different levels of credit and market risk.

• Financial planning: Bonds with suitable maturity dates can be aligned with goals such as education expenses, retirement income or other future cash requirements.

  
  

  Interest from most bonds is taxable according to the applicable tax rules. Only specifically notified tax-free bonds provide tax-exempt interest, so investors should not assume that every government-backed or tax-saving bond provides tax-free income.

  
  
  

Different organisations issue bonds to raise funds without issuing additional equity.

• Central governments: The Government of India issues dated government securities and other debt instruments to meet funding requirements. The RBI manages government borrowing and auctions on behalf of the government.
• State governments: State governments issue State Development Loans to finance expenditure and development programmes.
• Municipal bodies: Municipal corporations may issue bonds to fund projects such as water supply, transport, sanitation and other local infrastructure.
• Companies: Public and private companies issue corporate bonds or non-convertible debentures to finance expansion, equipment, acquisitions or refinancing.
• Public sector undertakings: Government-owned enterprises may issue bonds to support infrastructure and business operations.
• Financial institutions: Banks and other eligible financial institutions may issue different debt instruments, including subordinated or structured bonds.
• Supranational organisations: Institutions such as the World Bank may issue bonds to fund development programmes and international initiatives.
   

Bonds can be classified according to the issuer, interest structure, security and conversion terms.
1. Government bonds
Government bonds, commonly called Government Securities or G-Secs in India, are issued by the Central Government. They carry sovereign credit backing, although their market prices remain exposed to interest rate movements.
State Development Loans are similar instruments issued by state governments.
2. Corporate bonds
Companies issue corporate bonds to raise capital. These bonds may offer higher yields than government securities because investors take on the issuer’s credit risk.
Before investing, review the credit rating, financial position, security cover, maturity and payment terms.
3. Sovereign Gold Bonds
Sovereign Gold Bonds are government securities denominated in grams of gold. Their value is linked to the price of gold, and existing bonds may be available through the secondary market.
Investors should distinguish between purchasing an existing listed SGB and subscribing to a fresh government tranche. As of July 2026, the RBI’s SGB portal lists redemption information for existing series but does not show a new 2026 issuance calendar.
4. Municipal bonds
Municipal bonds are issued by municipal corporations or urban local bodies. Funds may be used for public infrastructure such as water systems, roads and sanitation projects.
The bond’s risk depends on the issuer’s finances, revenue arrangements and repayment structure.
5. High-yield bonds
High-yield bonds are issued by entities with ratings below investment grade. They generally offer higher yields to compensate investors for greater credit and default risk.
The rating categories used to identify investment-grade securities vary among rating agencies. Therefore, investors should review the actual rating and its definition rather than relying only on labels such as “junk bond”.
6. Convertible bonds
Convertible bonds allow investors to convert their bonds into a predetermined number of equity shares, subject to specified conditions.
They combine debt characteristics with possible equity participation. However, they may carry conversion, equity market and issuer-related risks.
7. RBI Floating Rate Savings Bonds
RBI Floating Rate Savings Bonds, 2020 (Taxable), are Government of India savings bonds whose interest rate is reset periodically according to the scheme’s terms.
They should not be confused with ordinary listed government securities. Their interest is taxable, and liquidity and premature redemption conditions apply.
 

Bond price and yield help investors understand a bond’s market value and potential return. They are related, but they do not mean the same thing.

1. Bond price

A bond’s price is the amount at which it is currently available in the market. It may trade:

• At par: At its face value
• At a premium: Above its face value
• At a discount: Below its face value

Bond prices usually move inversely to market interest rates. When interest rates rise, existing fixed-rate bonds may become less attractive, causing their prices to fall. When rates decline, prices of existing higher-coupon bonds may rise.
The price can also be affected by the issuer’s credit rating, remaining maturity, demand and market liquidity.

2. Current yield

Current yield compares a bond’s annual coupon income with its current market price.
Current yield = Annual coupon payment ÷ Current market price × 100
Suppose a bond pays ₹700 annually and is trading at ₹9,500.
Current yield = ₹700 ÷ ₹9,500 × 100 = 7.37%
Current yield does not account for the gain or loss between the purchase price and the amount repaid at maturity.

3. Yield to maturity

Yield to maturity, or YTM, estimates the total annualised return you may earn by holding a bond until maturity, assuming:

• Every coupon is paid as scheduled
• The principal is repaid in full
• Coupon payments are reinvested at the calculated rate
• You hold the bond until maturity

YTM considers the current price, face value, coupon payments and remaining tenure. It is generally calculated using financial software because the formula involves multiple future cash flows.
YTM is an estimate rather than a guaranteed return. Default, delayed payments, reinvestment rates and an early sale can change the actual return.
 

Before investing, review the bond’s issue document and key terms.

• Face value: The amount payable by the issuer at maturity. It is also the value generally used to calculate coupon payments.
• Coupon rate: The annual rate of interest calculated on the face value. A ₹10,000 bond with a 5% annual coupon would pay ₹500 a year, subject to the issue terms and issuer performance.
• Coupon frequency: Interest may be paid monthly, quarterly, half-yearly, annually or at maturity.
• Maturity date: The date on which the face value becomes due. Longer maturities generally carry greater sensitivity to interest rate changes.
• Credit rating: An independent assessment of the issuer’s creditworthiness. Ratings can change during the bond’s tenure.
• Security: Secured bonds may be backed by identified assets or receivables. Security does not guarantee full recovery if the issuer defaults.
• Call or put option: Some bonds allow the issuer or investor to redeem the bond before its scheduled maturity under specified conditions.
• Yield to maturity: The estimated annualised return if the bond is held until maturity and all payments are made as scheduled.
   

Bonds may offer several potential benefits when selected according to your goals and risk tolerance.

• Income generation: Coupon-paying bonds can provide scheduled interest income.
• Relative stability: High-quality bonds generally experience lower price volatility than equities, although long-duration and lower-rated bonds may still fluctuate significantly.
• Capital repayment: Holding a bond until maturity can avoid day-to-day market price movements. Repayment remains dependent on the issuer meeting its obligations.
• Diversification: Bonds can reduce dependence on a single asset class.
• Choice of maturities: You can select short-, medium- or long-term bonds according to when you expect to need the money.
• Range of credit profiles: The market includes sovereign securities and corporate bonds across different rating categories.
• Tradability: Some listed bonds can be sold in the secondary market. However, the availability of buyers and the price offered can vary.
   

Bonds may be less volatile than equities in some situations, but they are not risk-free. SEBI identifies credit, interest rate and liquidity considerations among the important risks bond investors should assess.
1. Interest rate risk
When market interest rates rise, prices of existing fixed-rate bonds generally fall. The effect is usually greater for bonds with longer maturities.
You may experience a loss if you sell such a bond before maturity.
2. Credit risk
Credit risk is the possibility that an issuer may delay or fail to pay interest or principal.
Lower-rated corporate bonds usually carry greater credit risk. Even a highly rated bond can be downgraded after issuance.
3. Liquidity risk
Some bonds trade infrequently. You may be unable to sell immediately or may have to accept a lower price.
A listed bond is not necessarily a liquid bond.
4. Inflation risk
Fixed coupon payments may lose purchasing power if inflation rises faster than the bond’s return.
This risk becomes more significant for long-term fixed-rate bonds.
5. Reinvestment risk
Coupon payments may have to be reinvested at lower interest rates than the original bond’s coupon rate.
This can reduce the return actually earned over the full investment period.
6. Call risk
An issuer may redeem a callable bond early when interest rates decline. You may then need to reinvest the proceeds at a lower rate.
7. Regulatory and political risk
Changes in regulations, taxation or government policy can affect bond prices, payment structures or investor eligibility. This risk may be more significant for foreign bonds and specialised debt instruments.
 

The process depends on whether you are buying government securities, a new corporate bond issue or an already listed bond.

1. Define your objective: Decide whether you need regular income, capital stability, diversification or a particular maturity.
2. Choose the bond category: Compare government securities, State Development Loans, treasury bills, corporate bonds and other available instruments.
3. Review the issue details: Check the issuer, credit rating, coupon rate, maturity, YTM, security, liquidity and tax treatment.
4. Select an investment channel: Government securities can be accessed through the RBI Retail Direct Scheme or eligible intermediaries. Corporate bonds may be purchased through brokers, recognised online bond platform providers or public issues.
5. Complete the transaction: Follow the platform’s KYC, payment and application process. Listed securities are commonly held electronically.
6. Monitor the investment: Track rating changes, issuer announcements, interest payments and maturity dates.
7. Hold or sell: You may hold the bond until maturity or sell a listed bond in the secondary market, subject to liquidity and market price.

The RBI Retail Direct Scheme allows individual investors to open a Retail Direct Gilt account and access government securities.
 

Consider the following factors before selecting a bond:

• Investment objective: Identify whether you need income, diversification or capital preservation.
• Risk tolerance: Government securities generally have lower credit risk, while lower-rated corporate bonds may offer higher yields with higher default risk.
• Time horizon: Match the maturity with the date when you expect to need your money.
• Credit quality: Read the rating rationale and monitor subsequent upgrades or downgrades.
• Yield: Compare coupon rate, current yield and YTM. A higher yield may indicate higher credit, liquidity or interest rate risk.
• Liquidity: Check trading volumes and whether the bond can reasonably be sold before maturity.
• Interest rate outlook: Longer-duration bonds are generally more sensitive to interest rate changes.
• Tax treatment: Interest and capital gains may be taxed differently depending on the bond and prevailing tax rules.

• Issue terms: Review security cover, seniority, call provisions, put provisions and default clauses.

  
  
  

Bonds can provide interest income, portfolio diversification and greater predictability than many market-linked investments. However, the level of safety varies considerably across issuers and bond types.
Evaluate the issuer’s creditworthiness, maturity, yield, liquidity, tax treatment and repayment terms before investing. A government security, investment-grade corporate bond and high-yield bond should not be treated as carrying the same risk. Align the investment with your goals and ability to hold it until maturity.