🏦 Understanding Bonds — A Complete Beginner’s Guide (Explained Simply for Indian Investors)

1️⃣ What Is a Bond? (The Easiest Explanation Ever)

Imagine your friend Rohan wants to build a small business. He asks you to lend ₹10,000 for 5 years and promises to pay you ₹500 every year as interest and return ₹10,000 at the end of 5 years.

You just gave Rohan a bond loan. In the real world:

• Rohan = Government or Company (the issuer)

• You = The investor or lender

• ₹10,000 = Principal or Face Value

• ₹500 per year = Coupon payment

• 5 years = Tenure / Maturity

So, a bond is a loan you give to a government or company in exchange for regular interest and repayment later.

2️⃣ Why Do Governments and Companies Issue Bonds?

Governments issue bonds to fund infrastructure, roads, defense, and welfare projects without printing more money.
Companies issue bonds to raise capital for factories, expansion, or refinancing debt — without giving away ownership like in equity.

It’s a win-win:

• They get funds.

• You get predictable income.

 

3️⃣ Why Should You Care About Bonds?

Even if you’re 15 or 50, understanding bonds is crucial. Here’s why:

Pro Tip 💡: When markets fall, bond prices often rise — that’s why bonds can protect your wealth during stock market crashes.

4️⃣ Types of Bonds in India (Simplified)

1. Government Bonds (G-Secs)

Issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
They include:

• Treasury Bills (T-Bills): Short-term (≤1 year)

• Dated Government Securities: Long-term (1–40 years)

• Sovereign Gold Bonds (SGBs): Linked to gold prices

2. State Development Loans (SDLs)

Issued by individual state governments.

3. Corporate Bonds / Debentures

Issued by private or public companies.
Types:

• Secured vs Unsecured

• Convertible vs Non-Convertible Debentures (NCDs)

  • NCDs are most common; listed on NSE/BSE for trading.

4. RBI Savings Bonds / Floating Rate Bonds

Issued periodically with interest linked to government bond yields.

5️⃣ Key Terms You Must Know (Bond Dictionary 📘)

 

6️⃣ How Bonds Work — A Simple Example

Suppose:

• Face Value = ₹1,000

• Coupon = 8% (₹80 per year)

• Maturity = 3 years

• You buy the bond at ₹950

You’ll get ₹80 + ₹80 + ₹80 + ₹1,000 at maturity.
Your Yield to Maturity (YTM) will be higher than 8% because you bought below par.

If you bought it at ₹1,050, your YTM would be lower than 8%.

Remember:
📉 When interest rates go up, bond prices fall.
📈 When interest rates go down, bond prices rise.

7️⃣ The Great Inverse Relationship: Bonds vs Interest Rates

This is the most important rule in bond investing.

Let’s break it down like a school problem.

You hold a ₹10,000 bond with 7% coupon (₹700 yearly).
If market rates rise to 9%, new bonds pay ₹900.
Would anyone pay ₹10,000 for your ₹700 bond? No — its price must drop until it gives the same 9% yield.

Hence:

Bond Price ↑ when Interest Rates ↓
Bond Price ↓ when Interest Rates ↑

That’s why traders closely watch RBI’s repo rate decisions — they affect bond prices.

8️⃣ How to Calculate Bond Price (Step-by-Step Example)

Let’s calculate:

Bond Details:

• Face Value = ₹10,000

• Coupon = 8% (₹800 annually)

• Maturity = 3 years

• Market Yield (YTM) = 6%

Use Present Value formula:

PV = 800/(1.06)^1 + 800/(1.06)^2 + (10,800)/(1.06)^3

= 754.7 + 712.0 + 9,066.7
= ₹10,533.4

✅ Because yield (6%) < coupon (8%), the bond trades above par.

9️⃣ Bond Ratings and Risk

Credit rating agencies in India: CRISIL, ICRA, CARE, India Ratings.

Higher ratings = Lower yield
Lower ratings = Higher yield (risk premium)

🔟 How to Invest in Bonds in India — Step-by-Step

🅰️ Government Bonds via RBI Retail Direct

1. Go to https://rbiretaildirect.org.in

2. Open a Retail Direct Gilt (RDG) Account (with PAN, Aadhaar, bank account).

3. Bid in Primary Auctions or buy from Secondary Market.

4. Bonds are held digitally — no physical certificates.

🅱️ Corporate Bonds / NCDs

1. Apply through your Stockbroker or bank when an NCD issue opens.

2. Listed NCDs can be bought/sold on NSE/BSE like shares.

3. Check issuer’s credit rating, coupon, tenure, and tax rules.

🅲️ Bond Mutual Funds / ETFs

If you prefer indirect exposure:

• Debt Mutual Funds invest in multiple bonds for diversification.

• Bond ETFs track bond indices (like Bharat Bond ETF).

 

🏦 1️⃣ How Stockbrokers Offer Bonds

Most SEBI-registered brokers give access to:

• Corporate Bonds / NCDs (non-convertible debentures)

• Tax-free PSU Bonds

• Listed Government Securities (G-Secs)

• Bond ETFs like Bharat Bond ETF

You’ll find these under the “Bonds,” “Fixed Income,” or “Debt Instruments” section of their platform.

📈 2️⃣ How It Works

1. Open a Demat + Trading Account (if you don’t already have one).

2. Browse available bond issues — brokers list ongoing NCD IPOs and bonds available in the secondary market.

3. Apply online during a public issue (primary market) or buy/sell listed bonds in the secondary market on NSE/BSE, just like shares.

4. Interest payments are credited directly to your linked bank account.

5. Principal is returned at maturity, automatically to your account.

 

🔍 3️⃣ Example

Let’s say Navi Finserv launches a 9.25% NCD issue on NSE:

• You log into your Broker account

• Go to Bonds → Ongoing Issues → Navi Finserv NCD

• Apply for the number of bonds you want (usually ₹1,000 face value each)

• After allotment, bonds appear in your Demat account

 

🧾 4️⃣ Advantages

✅ Simple online process (no need to visit RBI portal)
✅ Wide choice of corporate bonds
✅ Instant liquidity for listed bonds
✅ Transparent pricing

⚠️ 5️⃣ Things to Keep in Mind

• Check credit rating before buying (AAA safer than BBB).

• Verify yield to maturity (YTM) — it’s your true return.

• Bonds are less liquid than shares, so exit may take time.

• Interest is taxable as per your income tax slab.

 

🧭 Alternative Option

If you want to invest directly in Government Bonds (G-Secs) without a broker, you can use the RBI Retail Direct Portal — it’s free and easy to use for government securities.

Dhan stockbroker also offers different financial instrument to trade and invest such as Mutual Funds IPO’s, NFO’s, ETF, SGB, Bonds etc.

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Checkout Bond Return Calculator – Calculate YTM, Yield & Total Bond Returns

 

1️⃣1️⃣ Understanding Yield to Maturity (YTM) Clearly

YTM = the average annual return if you hold the bond till maturity and reinvest interest at same rate.

It’s like your “true” interest rate after considering purchase price and total returns.

If:

• You buy below par → YTM > Coupon

• You buy above par → YTM < Coupon

 

1️⃣2️⃣ Risks in Bonds (and How to Manage Them)

 

1️⃣3️⃣ The Yield Curve (Explained Like a Chart)

The yield curve shows bond yields for different maturities.

Typical shapes:

• Normal (Upward Sloping): Longer bonds = higher yields.

• Flat: Market unsure about rates.

• Inverted: Short-term yields > long-term → often signals slowdown.

In India, yield curves for G-Secs are tracked by RBI and NSE.

1️⃣4️⃣ Duration — The Sensitivity of a Bond

Duration ≈ average time it takes to get all payments.
Higher duration = more price sensitivity to rate changes.

Example:

• Duration = 5 years → 1% rate rise = ~5% price drop

• Duration = 2 years → 1% rate rise = ~2% price drop

For stable portfolios, use low-duration or short-term bonds.

1️⃣5️⃣ How Bonds Compare to Other Assets

 

1️⃣6️⃣ Taxation on Bonds in India (2025 Overview)

1. Coupon income → taxed as Interest Income under “Income from Other Sources” (slab rate).

2. Capital Gains:

   • Sold before 12 months → Short Term, taxed as per slab.

   • Sold after 12 months → Long Term, taxed at 10% (without indexation).

3. Tax-free Bonds: issued by PSUs like NHAI, PFC, REC — coupons are tax-free, but capital gains are taxable.

Pro Tip: Tax-free bonds are great for retirees seeking regular, tax-efficient income.

1️⃣7️⃣ Bond Investing Strategies (Beginner to Advanced)

1. Buy and Hold

Purchase and hold till maturity — no price risk if you don’t sell early.

2. Laddering

Buy multiple bonds maturing at different years — balances risk and reinvestment flexibility.

3. Barbell

Split investment between short-term and long-term bonds — flexible and yields higher.

4. Bond Trading

Buy/sell bonds based on rate movements — for advanced investors.

5. Debt Mutual Funds

Delegate selection and reinvestment to fund managers.

1️⃣8️⃣ Case Study — RBI’s 10-Year G-Sec Example

Suppose you buy a 10-Year G-Sec, 7.25%, issued at ₹100 face value.

• You get ₹7.25 interest each year per ₹100 invested.

• If RBI cuts repo rate, demand rises → bond price might go to ₹104.

• You can either hold for income or sell for profit.

That’s how bond traders earn through price movements.

1️⃣9️⃣ Real-World Example — Corporate Bonds

Tata Capital NCD Issue (hypothetical example):

• Face Value: ₹1,000

• Coupon: 9.5%

• Tenure: 5 years

• Rating: AAA

• Application: through Zerodha, HDFC Bank, or NSE

Investor earns ₹95 per bond per year and ₹1,000 at maturity. If bought in secondary market at ₹1,020, YTM drops slightly.

2️⃣0️⃣ How Interest Rates Affect Bonds and Stocks Together

• Rising rates → bond yields rise → stock valuations fall (cost of capital increases).

• Falling rates → bond yields fall → stocks rise (cheaper borrowing).

This relationship drives overall asset allocation decisions for investors and mutual funds.

2️⃣1️⃣ How to Start Your Bond Investment Journey (Checklist ✅)

1. Learn basics (you just did!).

2. Open RBI Retail Direct Account for G-Secs.

3. Get a Demat Account for corporate bonds/NCDs.

4. Research issuers and credit ratings.

5. Start small — invest ₹5,000–₹10,000 in G-Secs.

6. Track bond yields on NSE India and RBI sites.

7. Gradually build a laddered portfolio.

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2️⃣2️⃣ Pro Tips for Bond Investors 💡

✅ Always check credit rating and issuer reputation
✅ Don’t chase very high coupon rates blindly — higher yield often = higher risk
✅ For safety, stick to Government Bonds or AAA-rated NCDs
✅ Diversify maturities — avoid locking everything in long-term bonds
✅ Understand tax implications before investing
✅ Track RBI repo rate, inflation, and budget announcements

2️⃣3️⃣ Common FAQs About Bonds in India

Q1: Are bonds better than FDs?
A: Bonds can offer higher returns and tradability, but FDs have guaranteed returns and easier liquidity.

Q2: Can I lose money on bonds?
A: Yes — if interest rates rise (price falls) or if a company defaults. Government bonds are the safest.

Q3: What is the minimum amount to invest?
A: G-Secs start as low as ₹10,000 via RBI Retail Direct. Corporate NCDs often start at ₹1,000 per bond.

Q4: How are bond prices shown on NSE/BSE?
A: As a percentage of face value — e.g., 102 means ₹1,020 per ₹1,000 bond.

Q5: Can I sell before maturity?
A: Yes, in secondary market. But price depends on prevailing yields and demand.

Q6: Are there Islamic/Sukuk bonds in India?
A: Currently, India doesn’t issue Sukuk bonds widely due to regulatory frameworks.

2️⃣4️⃣ Advanced Section — How Traders Think About Bonds

Professional investors focus on:

• Yield Spread: Difference between corporate and government yields.

• Duration Matching: Matching bond durations with liabilities.

• Curve Trades: Predicting shape of yield curve changes.

• Credit Spread Arbitrage: Earning from mispriced corporate bonds.

You don’t need these for beginners, but knowing the ideas helps you appreciate how markets move.

2️⃣5️⃣ Future of Indian Bond Market (2025 and Beyond)

• Retail participation rising via RBI Retail Direct.

• More corporate bond listings improving liquidity.

• Bond ETFs like Bharat Bond make investing easier.

• RBI and SEBI reforms aim to deepen India’s bond market.

• Sustainability / Green Bonds growing fast (used for climate projects).

India’s bond market is expected to touch USD 2 trillion+ in the coming years.

2️⃣6️⃣ Mistakes Beginners Make

🚫 Ignoring credit ratings
🚫 Not understanding that price ≠ always ₹1,000
🚫 Selling too early due to short-term price moves
🚫 Not tracking taxes on interest income
🚫 Investing all in long-term bonds when rates may rise

 

2️⃣7️⃣ Bond Investment Example Portfolio (for learning)

 

2️⃣8️⃣ Myths About Bonds (Busted!)

 

2️⃣9️⃣ Quick Recap (Memory Table)

 

3️⃣0️⃣ Final Conclusion: Why Bonds Deserve a Place in Every Portfolio

Bonds may not make headlines like stocks, but they form the foundation of financial stability.

They protect your money during uncertain times, give predictable income, and help balance your investments.
For every beginner investor in India, learning about bonds is like learning how the financial system breathes — quietly, but powerfully.

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⚠️ Disclaimer

This article is for educational purposes only and should not be considered financial or investment advice. Investment in securities markets, including bonds, involves risks. Please do your own research or consult a SEBI-registered advisor before making investment decisions. Tax rules and interest rates may change over time.