Best Bonds to Invest in India 2025

When it comes to planning investments, the stock market often grabs the first attention. However, bonds in India offer a viable and often overlooked alternative for those looking to diversify their portfolios.

Looking for stable returns without the stock market uncertainties? Bond investments might be your answer.

Bonds offer 8-14% annual returns through corporate issuers and 6-7% through government securities. They’re safer than stocks and beat most bank FDs on returns. Investing in bonds provides a stable and relatively secure option, especially for individuals who prefer a steady income over the volatility of stocks.

This guide covers everything from AAA-rated bonds to PSU securities, shows you exactly which bonds deserve your money, and reveals the bond platforms where you can start investing today.

Let’s get into it.

What Are Bonds and How Do They Actually Work?

A bond is a debt instrument where you lend money to a company or government in exchange for regular interest payments and your principal back at maturity.

When you buy a bond, you are considered as the lender. The bond issuer becomes the borrower and promises to pay you back the borrowed amount (principal) on a specific date called the maturity date. While you wait, the issuer pays you periodic interest called the coupon.

Bonds work like an IOU with a fixed agreement. The issuer receives your money upfront to fund projects or operations.

For example, you invest Rs. 10,000 in a bond with an 8% coupon rate for 10 years. Every year, you get Rs. 800 as interest. When the 10 years end, you get your Rs. 10,000 back.

The coupon rate gets fixed when the bond is issued. It depends on market conditions, who’s issuing it, and how long the bond runs. Interest payments credit into your account monthly, quarterly, or annually.

What makes bonds different from stocks? Predictability. You know exactly what you’ll earn and when you’ll get it back. No surprises, no volatility shocks.

But there are certain risks present with investment in bonds. Interest rates move, companies can default, and inflation can eat into your returns.

That’s why knowing which bonds to pick matters more than most people think.

Types of Bonds You Can Invest in India

Bond investment options in India fall into several categories. Each serves different goals.

Government Bonds (G-Secs)

Government bonds are one of the safest bonds you can buy in India. The 10-year government bond currently yields around 6.49%. Returns are lower than corporate bonds, but your capital is rock solid.

Sub-types include Treasury Bills (short-term, less than a year), dated G-Secs (long-term government bonds), and State Development Loans (issued by state governments).

Corporate Bonds

Companies issue these types of bonds to raise capital. They pay higher returns than government bonds because they carry more risk. Expect 8-14% annual returns. With corporate bonds, credit quality matters a lot.

Corporate bonds can be secured (backed by assets) or unsecured (no collateral).

Always check the credit rating before investing.

PSU Bonds

Public Sector Undertakings like NTPC, Power Finance Corporation, or Indian Railway Finance Corporation issue these bonds. They combine government backing with better returns than pure G-Secs.

PSU bonds carry AAA or AA+ ratings typically. They’re the middle ground between safety and returns.

Tax-Free Bonds

Government entities like NHAI, IRFC, and PFC issue these. The interest you earn? Completely tax-free. Current rates are between 5.5-6.75% annually.

Perfect for high-income earners in the 20-30% tax bracket. When you factor in tax savings, effective returns beat many taxable options.

Infrastructure Bonds

These fund big projects like highways, power plants, and urban development.

Companies like NHAI and REC issue infrastructure bonds. They often come with tax benefits under specific sections.

Bank Bonds

SBI, HDFC Bank, Canara Bank, and others issue bank bonds to raise capital. They’re typically Basel III compliant and carry AA+ or AAA ratings.

With bank bonds, interest rates range from 7-8.5%.

Sovereign Gold Bonds

A unique option. Prices track gold, and you earn 2.5% annual interest on top.

The government recently announced redemption for the 2017-18 Series III, delivering 338% returns over 8 years.

List of the Best Bonds to Invest in India

Here are the bonds worth your attention right now.

Top AAA Rated Corporate Bonds

AAA ratings mean the highest safety among corporate bonds. These issuers have strong financials and minimal default risk.

HDB Financial Services: AAA rated, yields around 7.4-7.87%. One of the most traded AAA bonds in the secondary market.
Aditya Birla Capital: AAA rated, offering 7.77-7.87% yields. Strong NBFC with solid fundamentals.
Axis Finance: AAA rating, yields approximately 7.55%. Bank-backed NBFC provides additional security.
Tata Capital: AAA rated, delivering 7.28% yields. Trusted Tata brand backing.
Mahindra & Mahindra Financial Services: AAA rated, short 8-month tenure, 7.4% yield. Good for those wanting quick exits.

These bonds trade on NSE and BSE. Minimum investments typically start at Rs. 10,000-1,00,000 depending on the bond.

Best Government Bonds

10-Year G-Sec (Current Benchmark): Yielding 6.49%. The safest long-term option.
7.38% GS 2027: Short-term government bond (1-2 years), yield 5.655%. Good liquidity.
6.33% GS 2035: Medium-term (9-10 years), yield 6.49%. Balanced tenure and returns.
7.24% GS 2055: Long-term (28-30 years), yield 7.07%. Highest government bond returns.
Treasury Bills (91/182/364 days): Yields 5.4-5.5%. Perfect for parking short-term funds.

Buy government bonds directly through RBI Retail Direct portal. Zero commission, minimum investment just Rs. 10,000.

Top PSU Bonds

NTPC Bonds: India’s largest power company, yields 7-8.5%. Government-backed stability.
Power Finance Corporation (PFC): Financing power sector projects, AAA rated. Competitive yields around 7-8%.
Rural Electrification Corporation (REC): Similar to PFC, funds rural power projects. AAA rated, stable returns.
Indian Railway Finance Corporation (IRFC): Finances railway infrastructure. Sovereign guarantee makes it ultra-safe.
National Highways Authority of India (NHAI): Builds highways, tax-free bonds available. Returns 6.25-6.75% tax-free.

Tax-Free Bonds Currently Available

Current tax-free bonds trade in the secondary market. New issues are subject to government approval.

NHAI Tax-Free Bonds: Maturity dates ranging 2029-2035, coupon rates 7.64-8.75%. Trade on exchanges.
NTPC Tax-Free Bonds: 8.91% coupon, maturity 2033, yield to maturity 5.6%.
PFC Tax-Free Bonds: 8.67% coupon, maturity 2033, YTM 5.2%.
IRFC Tax-Free Bonds: 8.63% coupon, maturity 2029, YTM 5.11%.
HUDCO Tax-Free Bonds: 7.64% coupon, maturity 2032, YTM 5.7%.

These bonds don’t have new issues often. When available, they get oversubscribed quickly due to tax benefits.

Best Bank Bonds

State Bank of India: AA+ rated, unsecured Basel III bonds. Strong government backing.
HDFC Bank: AA+ rated, Additional Tier 1 bonds. Private sector reliability.
Canara Bank: AA+ rated, 8.24% coupon rate bonds. Listed on NSE.
Bank of Baroda: AA+ rated, Basel III bonds. Public sector stability.
Punjab National Bank: AA+ rated, 8.30% coupon. Competitive returns for a PSU bank.

Bank bonds typically have longer tenures (perpetual or 10+ years). They’re for investors okay with locking funds long-term.

Bharat Bond ETF

A different approach to bond investing. The government launched Bharat Bond ETFs that invest in PSU bonds.

Bharat Bond ETF – April 2030: 1-year return of 8.68%, 5-year return of 38.92%. Expense ratio just 0.01%.
Bharat Bond ETF – April 2031: Invests in IRFC, NABARD bonds. AAA rated portfolio.
Bharat Bond ETF – April 2032: Moderate risk, debt category. 1-year return 8.3%.
Bharat Bond ETF – April 2033: 1-year return 7.76%. Longer maturity profile.

ETFs offer better liquidity than individual bonds. You can buy and sell them like stocks on exchanges.

9 Best Bond Investment Platforms in India

Digital platforms have changed how Indians invest in bonds. You no longer need brokers or lengthy paperwork. Here are the top platforms where you can start investing today.

1) IndiaBonds

IndiaBonds is a SEBI-registered stockbroker with OBPP licenses from NSE and BSE. The platform serves 175,000+ users and has transacted over Rs. 3,100 crores in bonds.

Key Features

It allows you to access 25,000+ INR-denominated bonds searchable by ISIN, issuer, rating, yield, or maturity.
The Bond Yield Calculator provides cashflow analysis and settlement amounts before investing.
Zero brokerage on secondary market purchases, no account fees, and payments go directly to SEBI-regulated clearing houses.
Invest in G-Secs, corporate bonds (AAA to A rated), tax-free bonds, PSU bonds, SDLs, sovereign gold bonds, and FDs up to 9.4%.
Curated bond packs include high-yield, state-guaranteed, bank, and monthly income themes.
Complete paperless KYC online with PAN, Aadhaar, bank details, and Demat account.
Minimum investment starts at Rs. 10,000 for most bonds.
All bonds are NSE/BSE listed and rated by CRISIL, ICRA, or CARE.

Returns

6-7% on government bonds, 7.5-8.5% on AAA corporate bonds, up to 12% on lower-rated investment-grade bonds.

The platform features clean interface, real-time pricing, live chat support, and educational resources.

2) GoldenPi

GoldenPi stands as India’s largest online bond platform with over 900,000 registered users and Rs. 4,000+ crores worth of bonds listed daily. The platform holds SEBI registration as a debt broker and OBPP license.

Key Features

GoldenPi has the most extensive bond collection among Indian platforms
The platform connects with most major bond institutions in India as suppliers. This network allows GoldenPi to find the lowest prices in the secondary market for many bonds.
Real-time pricing updates across 4,000+ crores worth of bonds.
It has good product range that includes listed corporate bonds (secured and unsecured), non-convertible debentures (NCDs), NCD IPOs, fixed deposits from banks and NBFCs, sovereign gold bonds (SGBs), government securities (G-Secs), treasury bills, state development loans.
GoldenPi built a comprehensive bond-trading engine integrated with exchanges.
Built-in filters let you search bonds by coupon, yield, interest payment frequency, security level, credit rating, face value, issuer type, and other parameters.
The platform runs a Knowledge Centre where you can learn bond investment fundamentals.
GoldenPi partners with Zerodha, allowing Zerodha users to access bond investments through a dedicated interface.

3) Jiraaf

Jiraaf operates as a SEBI-regulated online bond platform backed by global investors Accel and Harmony Partners, plus prominent Indian entrepreneurs including Pharmeasy co-founders. The platform offers 8-15% annual fixed returns with investment starting at Rs. 1,000.

Key Features

India’s first Bond Analyser Suite launched in June 2025, providing institutional-grade analysis tools for retail investors.
Aggregates data from FIMMDA, NSDL, CDSL, NSE/BSE, and SEBI to track issuer landscape and creditworthiness.
“Invest More, Earn More” feature rewards larger investments with higher YTM.
All bonds pass through internal risk committee before listing, with complete risk disclosure.
Product range includes corporate bonds, SDIs/PTCs, high-yield FDs, T-bills, and G-Secs with tenures from 3 to 36 months.
Human support backed by relationship managers, not just automated bots.
100+ years of combined fixed-income investing experience across the team.
Bank-grade encryption and SEBI registration ensuring highest security standards.
All bonds listed on BSE/NSE and rated by CRISIL, ICRA, or CARE.
Tax-efficient bond options to maximize post-tax returns.
User-friendly app with filtering options across multiple tenures and investment goals.

4) Wint Wealth

Wint Wealth is a SEBI-registered online bond platform backed by high-profile fintech entrepreneurs. It specializes in senior secured corporate bonds, offering investors 9–12% fixed returns on carefully vetted issues. The platform co-invests 2% in every bond it lists, aligning its interests with its users.

Key Features

Senior secured bonds only, backed by specific collateral for enhanced safety.
Yields of 9–12% on fixed-income offerings with zero defaults to date.
Rs. 1,000 minimum investment, making high-yield bonds accessible to all.
2% co-investment by Wint Wealth in every bond, ensuring aligned incentives.
ISO 27001 certification and bank-grade encryption for top-notch data security.
Real-time interest payment tracking and maturity alerts via mobile app.
Online exit option through DDPI activation for partial or full bond resale.
Expert-curated bond selection, limited to 10–20 high-quality options at a time.
Prominent backers include founders of Zerodha, CRED, Groww, smallcase, and Indiagold.
Customer support through live chat and ticketing, with rapid KYC and onboarding..

5) BondBazaar

BondBazaar is a SEBI-registered bond trading platform and member of NSE and BSE that functions like a stock exchange for bonds. It offers access to over 10,000 listed bonds spanning government securities, corporate bonds, and tax-free issues without any brokerage or hidden charges.

Key Features

Buy and sell bonds anytime like stocks, with no exit penalties or fees.
Over 10,000 bonds listed from NSE, BSE, and RFQ systems, including G-Secs, corporate bonds, SDLs, and tax-free bonds.
Minimum investment as low as Rs. 100 on select bonds and standard Rs. 1,000 or Rs. 10,000 face-value lots.
Zero brokerage, zero account opening fees, and zero maintenance charges across all transactions.
Real-time price discovery with integrated trading terminal connecting multiple exchanges for best execution.
Proprietary yield calculator that breaks down cashflows, payment frequency, and maturity returns before you invest.
Flexible interest payout options: monthly, quarterly, annual, or at maturity to suit cash flow needs.
Tenure range from 90 days to 40 years, enabling short-term parking or long-term planning.
Tax-saving bond categories and tax-free PSU bonds included for high-net-worth investors seeking tax efficiency.
Demat-based holdings with direct credit of interest and principal to your linked bank account upon maturity.

6) Grip Invest

Grip Invest is a SEBI-licensed Online Bond Platform Provider that offers direct access to corporate bonds, securitized debt instruments, and high-yield fixed deposits through NSE’s RFQ system. Backed by marquee investors and pioneers in retail-debt innovations, it has enabled over Rs. 1,100 crores of investments across 400,000+ users since 2020.

Key Features

SEBI OBPP license with direct NSE integration via RFQ for secure execution.
First-to-market SDI listings on NSE and 24×7 investing through AMO orders.
Minimum investment of Rs. 1,000 for bonds and SDIs, lowering entry barriers.
Curated product mix: corporate bonds, asset-backed SDIs, and high-yield FDs with 10–14% returns.
“Bond Baskets” feature for theme-based diversification across sectors and tenures.
Rigorous in-house due diligence; all offerings carry CRISIL, ICRA, or CARE ratings.
RFQ integration ensures trades settle through regulated NSE channels, enhancing transparency.
Dashboard to track portfolio, interest payouts, and maturity schedules in real time.
Marquee backing from Venture Highway, Stride Ventures, and others, validating platform credibility.

7) Moneycontrol Bonds

Moneycontrol Bonds is the bond research and information hub of Moneycontrol, India’s leading financial news platform. It offers real-time data, market news, and analytical tools to help investors research government and corporate bonds before making investment decisions. Through its partnership with TheFixedIncome, users can seamlessly transition from research to investing in bonds without leaving the Moneycontrol interface.

Key Features

Live bond quotes for NSE- and BSE-listed government securities, corporate bonds, tax-free bonds, and more.
Advanced filtering by issuer, credit rating, coupon rate, yield range, and maturity date.
“Bond Central” free repository launched in Feb 2025, consolidating all corporate bond listings in one searchable database.
Comprehensive bond profiles showing issue date, face value, payment frequency, and trading volumes.
Side-by-side comparison of bond yields against G-Sec benchmarks and bond indices.
Curated news and analysis on new bond issues, regulatory changes, and market trends.
Integration with TheFixedIncome for direct bond purchasing and real-time order execution.
Educational “Bond Simplified” series explaining bond basics, tax treatment, and investment strategies.
Alerts and watchlists for price movements, new listings, and changes to credit ratings.
Mobile-friendly interface with portfolio tracking and personalized dashboards on the Moneycontrol app.

8) TheFixedIncome

TheFixedIncome is a SEBI-registered online bond platform backed by Tipsons Group’s 30+ years of fixed-income expertise. It serves 150,000+ investors and has facilitated over Rs. 2,000 crores in bond investments since 2019. The platform offers direct access to corporate bonds, government securities, PSU bonds, tax-free bonds, and themed Bond Baskets all with zero brokerage and transparent pricing.

Key Features

Curated portfolios by theme, maturity, or yield.
No fees on buy or sell orders across all securities.
Fully compliant with regulatory standards and disclosures.
Personalized guidance for portfolio planning.
Real-time tracking of holdings, interest, and maturities.
Wide product range that includes Corporate bonds, G-Secs, SDLs, SGBs, and FDs.
Minimum investment starts at Rs. 10,000 for most bonds.

9) RBI Retail Direct

RBI Retail Direct is the Reserve Bank of India’s official platform that lets individual investors buy and manage government securities directly without intermediaries or commissions. Launched in November 2021, it provides free access to dated G-Secs, treasury bills, state development loans, and sovereign gold bonds, all held in a dedicated Demat account under your name.

Key Features

Zero brokerage, zero account opening fees, and no annual maintenance charges.
Direct access to primary auctions for T-bills, G-Secs, SDLs, and SGBs via RBI’s NDS-OM platform.
Minimum investment of Rs. 10,000 for most government securities; Rs. 1,000 for select issues.
Completely paperless KYC with CKYC or Aadhaar XML options and instant online verification.
Semi-annual or annual interest payments credited directly to your linked bank account.
Sovereign guarantee ensures zero default risk backed by Government of India.
Secondary market trading through stock exchanges for liquidity before maturity.
Nomination facility, pledge/lien options, and gifting of securities to other retail investors.
Consolidated dashboard to view holdings, transaction history, and nominee details online.
RBI support for grievance redressal ensure a smooth investor experience.

Most platforms require KYC completion and Demat account. The process takes 2-3 days.

Government Bonds vs Corporate Bonds

The fundamental choice every bond investor faces. Below are certain things that will help you to make the right choice.

Safety

Government bonds carry sovereign guarantee. Zero default risk. Your money is safe even if the economy tanks.

Corporate bonds depend on company health. Even AAA ratings don’t eliminate default risk completely. In 2021, domestic companies defaulted on over Rs. 5,700 crores.

Returns

Government bonds yield 5.5-6.5% typically. Lower returns for higher safety.

Corporate bonds offer 8-14%. The extra return compensates for additional risk.

Taxation

Both are taxed similarly. Interest is taxable as per your slab rate. Capital gains taxation depends on holding period and listing status.

Listed bonds: LTCG (held over 12 months) taxed at 12.5%, STCG at slab rates.

Unlisted bonds: As per section 50AA (from July 2024), all gains taxed at slab rates regardless of holding period.

Liquidity

Government bonds are more liquid. They trade actively on exchanges and through RBI’s platform.

Corporate bonds face liquidity challenges. Most investors hold till maturity. Secondary market trading volumes are lower than government bonds.

Who Should Choose What?

Risk-averse investors, retirees, and those prioritizing capital safety should stick with government bonds.

Investors comfortable with moderate risk and seeking higher income should consider high-rated (AAA/AA) corporate bonds.

A balanced approach works best for most people: 60-70% in government and PSU bonds, 30-40% in AAA-rated corporate bonds.

Bonds vs Fixed Deposits: Which Is Better

The classic comparison every conservative investor faces.

Returns

FD rates: 6.4-7.0% for most banks. Small finance banks offer 7-8.5%.

Bond returns: 8-14% for corporate bonds, 6.5-7% for government bonds.

Bonds typically beat FD returns by 1-3%.

Safety

FDs are insured up to Rs. 5 lakhs by DICGC. Your principal is safe even if the bank fails (for amounts under Rs. 5 lakhs).

Government bonds carry sovereign guarantee. Completely safe.

Corporate bonds depend on issuer creditworthiness. Even AAA bonds have some default risk, though minimal.

Advantage: FDs for small amounts (under Rs. 5 lakhs), government bonds for any amount, corporate bonds only if highly rated.

Liquidity

FDs allow premature withdrawal. You pay penalty (usually 0.5-1% interest) but get your money back.

Government bonds are liquid. You can sell on exchanges or through RBI’s platform.

Corporate bonds face liquidity issues. Selling before maturity can be challenging. You might wait days to find buyers.

Advantage: FDs

Taxation

FD interest is added to your income and taxed at slab rates. TDS applies if interest exceeds Rs. 40,000 (Rs. 1 lakh for seniors).

Bond interest is also taxed at slab rates.

Capital gains on bonds: Listed bonds held over 12 months taxed at 12.5%, shorter periods at slab rates.

FDs have no capital gains component. Only interest is taxed.

Tax-free bonds offer tax-exempt interest. This can be a big advantage for high earners.

Advantage: Slight edge to bonds (due to LTCG treatment and tax-free options)

Flexibility

FDs have fixed tenures. Breaking before maturity incurs penalties.

Bonds can be sold in secondary market. But prices fluctuate based on interest rates.

Advantage: Bonds (if you’re okay with price fluctuations)

Minimum Investment

FDs: Rs. 1,000-10,000 minimum depending on bank.

Bonds: Rs. 1,000-10,000 typically. Government bonds through RBI need Rs. 10,000 minimum.

Advantage: Tie

Which Should You Choose?

FDs for emergency funds. They’re accessible, safe, and don’t fluctuate in value.

Government bonds for safety with slightly better returns. Ideal for retirees.

High-rated corporate bonds (AAA/AA) for higher returns with moderate safety. Good for investors comfortable with slightly more risk.

A mix works best for most people: 30-40% in FDs/savings for liquidity, 30-40% in government bonds for safety, 20-30% in AAA corporate bonds for returns.

How to Buy Bonds in India: Step-by-Step Process

The process of buying bonds is very simple and straightforward. Here’s exactly how to do it.

Step 1: Choose Your Platform

For corporate bonds: Use platforms like IndiaBonds, GoldenPi, Wint Wealth, or Jiraaf.

For government bonds: RBI Retail Direct is your best bet. Zero fees, direct access.

For both: Some brokers like HDFC Securities, ICICI Direct, and Kotak Securities offer both.

Step 2: Complete KYC

You’ll need PAN card, Aadhaar, bank account details, and a Demat account.

Most platforms allow online KYC through DigiLocker. Takes 5-10 minutes.

Demat account is mandatory for holding bonds. If you have one for stocks, the same account works for bonds.

Step 3: Link Bank Account

Connect your savings account to the bond platform. This enables payment processing and interest credit.

Step 4: Research and Select Bonds

Filter bonds by credit rating, yield, tenure, and interest payout frequency.

Check the issuer’s credit rating from CRISIL, ICRA, or CARE websites.

Read the offer document. It contains terms, repayment schedules, and risk factors.

Compare yields across similar-rated bonds. Higher yield than peers might indicate hidden risks.

Step 5: Place Your Order

Select the bond and quantity. Minimum investment is typically Rs. 10,000 (10 bonds of Rs. 1,000 face value).

Some platforms offer bonds for Rs. 1,000 minimum.

Payment modes: UPI, net banking, NEFT/RTGS.

Step 6: Confirmation and Settlement

For primary market (NCD IPOs): Allotment happens on first-come-first-served basis. You get bonds in your Demat within 7-10 days.

For secondary market: Settlement happens in T+1 or T+2 days. Bonds credit to your Demat account.

Step 7: Track Your Investment

Monitor interest payments. They credit directly to your linked bank account.

Check bond price movements if you plan to sell before maturity.

Review issuer’s credit rating quarterly.

How to Buy Government Bonds Through RBI Retail Direct?

Visit rbiretaildirect.org.in.
Open RDG (Retail Direct Gilt) account. It’s free.
Complete online KYC.
Access primary auctions for T-bills, G-secs, SGBs, and SDLs.
Trade in secondary market through NDS-OM platform.

Minimum investment: Rs. 10,000 for most G-secs, Rs. 1,000 for some bonds.

The whole process is digital. No broker needed. No commission charged.

How to Buy Government Bonds Through Brokers?

Open trading and Demat account with your broker.
Search for bonds in the debt/bond section.
Check available bonds, yields, and maturity dates.
Place order like buying stocks.
Settlement and delivery happen through your Demat account.

Brokers charge brokerage on bond transactions. Check fee structure before buying.

Bond Investment Risks You Need to Know

Bonds are safer than stocks, but they’re not risk-free. Here are the risks that matter.

Credit Risk (Default Risk)

The issuer might fail to pay interest or return principal. This is the biggest risk in corporate bonds.

Check credit ratings before investing. Stick to investment-grade bonds (BBB and above).

Diversify across issuers. Don’t put all money in one company’s bonds.

Government bonds carry zero credit risk. Corporate bonds, even AAA rated ones, have some default probability.

Interest Rate Risk

Bond prices and interest rates move inversely. When rates rise, bond prices fall. When rates fall, bond prices rise.

If you hold till maturity, this doesn’t affect you. You get the promised interest and principal.

If you need to sell before maturity, you might face losses if interest rates have risen.

Duration measures interest rate sensitivity. Longer maturity bonds have higher duration and more price volatility.

Inflation Risk

Inflation erodes real returns. If your bond pays 7% and inflation is 6%, your real return is just 1%.

Inflation-linked bonds adjust for this. But most bonds have fixed payments.

Calculate real yield: Nominal yield minus inflation rate. If real yield is negative, you’re losing purchasing power.

Liquidity Risk

Corporate bonds have low trading volumes. Selling before maturity can be difficult.

You might have to offer significant discounts to find buyers. This creates potential losses even if the bond itself is sound.

Government bonds are more liquid. PSU bonds have moderate liquidity.

AAA-rated bonds from well-known issuers have better liquidity than lower-rated bonds.

Reinvestment Risk

When you receive interest payments or your bond matures, you might not find similar opportunities.

If interest rates have fallen, you’ll earn lower returns on reinvested funds.

This affects long-term compounding, especially for bonds with frequent interest payments.

Call Risk

Some bonds are callable. The issuer can buy them back before maturity.

They typically call bonds when interest rates fall. You lose future interest payments and must reinvest at lower rates.

Check if a bond is callable before buying. Callable bonds should offer higher yields to compensate for this risk.

Currency Risk

Only matters if you buy foreign bonds. Currency fluctuations can impact returns.

Stick to rupee-denominated bonds if you’re not comfortable managing currency risk.

How to Manage Bond Risks?

Diversify across issuers, sectors, and maturities.
Match bond maturity with your financial goals. Need money in 3 years? Buy bonds maturing around then.
Buy bonds with staggered maturities. Some mature every year, providing regular liquidity.
Monitor credit ratings quarterly.
Hold quality over chasing yields. Don’t buy low-rated bonds just for 2-3% extra return.
Consider bond mutual funds or ETFs for diversification. They spread risk across multiple bonds.

Credit Ratings in Bonds Investment Explained: CRISIL, ICRA, CARE

Credit ratings are your primary tool for assessing bond safety. Understanding them is crucial.

Major Credit Rating Agencies in India

CRISIL (Credit Rating Information Services of India Limited): Established 1987, majority owned by S&P Global. Most respected agency in India. Rated over 35,000 entities.

ICRA (Investment Information and Credit Rating Agency): 52% stake held by Moody’s. Second major agency. SEBI registered.

CARE (Credit Analysis and Research Limited): Independent Indian agency. SEBI registered. Widely used.

India Ratings and Research: Part of Fitch Ratings group. International standards.

Acuite Ratings and Research: Indian agency focusing on SMEs and smaller issuers.

All are SEBI registered and follow strict rating methodologies.

Rating Scales and What They Mean

Long-term instruments (bonds, debentures):

AAA: Highest safety, lowest credit risk. Default probability minimal.
AA+, AA, AA-: High safety, very low credit risk. Slight notch below AAA.
A+, A, A-: Adequate safety, low credit risk. Investment grade.
BBB+, BBB, BBB-: Moderate safety, moderate credit risk. Still investment grade, but approaching speculative.
BB+, BB, BB-: Moderate risk of default. Speculative grade begins.
B+, B, B-: High risk of default. Junk bonds.
C: Very high risk of default.
D: In default or expected to be in default.

Short-term instruments (CPs, short-term bonds):

A1+: Highest safety
A1, A2, A3: Declining safety
A4: Minimal safety
D: Default

The + and – signs create finer distinctions within each grade.

How Agencies Assign Credit Ratings?

They evaluate:

Financial strength: Revenue stability, profitability, cash flows
Debt levels: Total debt, debt-to-equity ratio, interest coverage
Business position: Market share, competitive advantages, industry trends
Management quality: Track record, corporate governance
Economic environment: Industry outlook, regulatory changes

The process involves meeting management, analyzing financial statements, industry research, and peer comparison.

Ratings aren’t permanent. Agencies review them periodically and change them based on new information.

Why Ratings Matter for Bond Investors?

They provide independent assessment of default risk. You don’t have to analyze complex financials yourself.

Higher ratings mean lower yields, lower ratings mean higher yields. The extra yield compensates for extra risk.

Professional investors (mutual funds, insurance companies) have mandates to invest only in certain rating categories. This creates demand differences.

Ratings are opinions, not guarantees. Even AAA bonds can default (though rare).

Taxation on Bond Investments in India

Bonds have two income components, interest and capital gains. Both are taxed, but differently.

Interest Income Taxation

Bond interest is added to your gross total income.

It’s taxed at your applicable slab rate.

Example: You earn Rs. 80,000 interest from bonds. It’s added to your other income. If you’re in the 30% bracket, you pay Rs. 24,000 tax.

No TDS on interest for most bonds. You report it yourself while filing returns.

Government bonds and some corporate bonds might have TDS.

Exception: Tax-Free Bonds

Interest from tax-free bonds is completely exempt. Not added to your income.

But capital gains from tax-free bonds aren’t exempt. If you sell them at profit, that profit is taxed.

Capital Gains Taxation

Capital gain occurs when you sell a bond for more than you paid.

Taxation depends on holding period and whether the bond is listed.

For Listed Bonds:

Held over 12 months: Long-Term Capital Gain (LTCG)

Tax rate: 12.5% plus cess (no indexation benefit)

Held less than 12 months: Short-Term Capital Gain (STCG)

Tax rate: As per your slab rate

For Unlisted Bonds:

From July 23, 2024, Section 50AA applies

All gains are treated as STCG regardless of holding period

Tax rate: As per your slab rate

Section 54EC Capital Gains Bonds

Special bonds for saving capital gains tax.

When you sell property or land and make LTCG, you can invest that gain in 54EC bonds.

This investment exempts you from paying capital gains tax.

Lock-in period: 5 years

Maximum investment: Rs. 50 lakhs per financial year

Issuers: REC, PFC, NHAI, IRFC

Interest rate: Around 5-5.5%

Secondary Bond Market and Liquidity

Most investors hold bonds till maturity, but you can sell them earlier through the secondary market.

How the Secondary Market Works

Bonds trade on NSE and BSE like stocks.

You place sell orders through your broker or bond platform.

Buyers and sellers connect through the exchange.

Settlement happens in T+1 or T+2 days.

Bond Price Movements

Bond prices fluctuate based on interest rates.

When RBI increases repo rates, bond prices fall. New bonds offer higher rates, making existing bonds less attractive.

When RBI cuts rates, bond prices rise. Existing bonds with higher rates become valuable.

Credit rating changes impact prices. Downgrades cause price drops, upgrades cause increases.

Demand-supply dynamics matter. Low demand means you might have to sell at discount.

Common Bond Investment Mistakes to Avoid

Learn from others’ errors. Here are mistakes that cost investors money.

Chasing High Yields Without Checking Credit Quality

A 14% yield looks attractive. But if it’s from a BB-rated company, default risk is high.

Always check credit rating first. If a bond yields significantly more than peers with similar ratings, investigate why.

Don’t let greed override risk assessment.

Ignoring Interest Rate Risk

Many investors buy bonds without considering how interest rate changes affect them.

If you buy a 10-year bond today and rates rise tomorrow, your bond’s market value drops.

Solution: Match maturity with your needs. If you can hold till maturity, interest rate fluctuations don’t matter.

Concentration in One Issuer or Sector

Putting all money in one company’s bonds is risky.

If that company faces trouble, your entire bond portfolio suffers.

Diversify across issuers, sectors, and maturities.

Not Reading the Offer Document

The offer document contains crucial information: redemption terms, call provisions, security details.

Many investors skip it and regret later.

Spend 30 minutes reading it. Pay attention to redemption clauses and security arrangements.

Overlooking Inflation

Your bond gives 7% return. Inflation is 6%. Real return is just 1%.

Always calculate real return: Nominal yield minus inflation.

If inflation is high, consider inflation-linked bonds or shorter-term bonds that you can roll over when rates rise.

Buying Bonds at Wrong Time

Buying long-term bonds when interest rates are at historic lows is risky.

When rates rise (which they will), your bond’s value drops significantly.

Better strategy: Invest in shorter-term bonds during low-rate environments. Shift to longer-term bonds when rates peak.

Not Checking Past Performance of Issuer

Just because a company is big doesn’t mean it’s financially healthy.

Check financial statements, debt levels, interest coverage ratios.

Look at past annual reports to verify the company has consistently paid obligations.

Mixing Up Yield and Coupon Rate

Coupon rate is what the bond pays on face value.

Yield is what you actually earn based on the price you paid.

If you buy a bond at discount, yield exceeds coupon. At premium, yield falls below coupon.

Always focus on yield, not coupon.

Neglecting Callable Bonds

Some bonds allow the issuer to buy them back before maturity.

They call bonds when interest rates fall. You lose future interest payments.

Check if a bond is callable. If yes, demand higher yield to compensate.

Ignoring Tax Implications

Not factoring taxes into returns can mislead you.

An 8% taxable bond might give lower post-tax return than a 6% tax-free bond for high earners.

Calculate post-tax returns before comparing bonds.

Panic Selling During Rate Hikes

When RBI increases rates, bond prices fall.

Many investors panic and sell, realizing losses.

If you don’t need the money immediately, hold till maturity. You’ll still get full face value and interest.

Not Maintaining Liquidity

Bonds aren’t as liquid as stocks.

Investing your entire portfolio in bonds can create liquidity problems.

Keep 6-12 months expenses in liquid assets before buying bonds.

Trusting Unregistered Platforms

Only use SEBI-registered platforms for buying bonds.

Unregistered platforms might offer great rates but pose fraud risks.

Verify platform credentials on SEBI website before investing.

Conclusion

In brief, Bonds in India present a wide array of opportunities for investors seeking alternatives to the stock market. They offer a middle ground between the safety of FDs and the volatility of stocks.

Bond investing isn’t complicated once you understand the basics. Start small, learn as you go, and gradually increase allocation.

As you explore the best bonds to invest in India, remember to align your choices with your long-term financial goals, timeline, and risk tolerance.

Now you have the complete picture. Time to take action.