A fixed-income instrument where an investor lends money to a government or corporation in exchange for periodic interest payments and return of principal at maturity.
A bond is a debt security where the issuer (borrower) promises to pay the holder (lender) periodic interest (Coupon Rate) and return the principal (Face Value) on a specified maturity date. Bonds are the backbone of fixed-income investing and are generally considered less risky than equities.
In India, bonds are issued by the central government (G-Secs and T-Bills), state governments (SDLs — State Development Loans), public sector undertakings (PSU bonds like NHAI, REC, PFC), and private corporations (corporate bonds like those from HDFC Ltd, ICICI Home Finance). Government securities are considered risk-free for domestic currency investment, while corporate bonds carry varying degrees of credit risk assessed by Credit Rating agencies like CRISIL, ICRA, and CARE.
The Indian bond market is predominantly institutional, but retail participation has increased through RBI Retail Direct (allowing direct purchase of G-Secs), Sovereign Gold Bonds, and debt mutual funds. A 10-year G-Sec yielding 7.2% means an investor buying Rs 1 lakh face value receives Rs 7,200 annually (typically in semi-annual payments of Rs 3,600) and gets Rs 1 lakh back at maturity.
Bond prices and yields move inversely. When the RBI cuts interest rates, existing bonds with higher coupon rates become more valuable, pushing prices up (and yields down). The Duration of a bond measures its sensitivity to interest rate changes — a bond with 8-year duration will see approximately 8% price change for every 1% change in yields. This makes long-duration bonds more volatile but also more rewarding when rates are falling.
For Indian investors, bonds serve multiple portfolio roles: capital preservation (short-term G-Secs and AAA corporate bonds), income generation (high-coupon PSU bonds), and tactical trading (duration bets around RBI policy). Tax-free bonds issued by government entities like NHAI and IRFC offer 5.5-6% tax-free yields, which translates to pre-tax equivalent yields of 8-9% for investors in the 30% tax bracket, making them extremely attractive for conservative portfolios.
India Context
RBI Retail Direct enables retail G-Sec investment. SEBI regulates corporate bonds. NDS-OM is the primary trading platform for G-Secs. Tax-free bonds from NHAI/IRFC/REC are popular.