What are the Types of Bonds in India?

Introduction

Ever searched for bonds and got confused seeing endless types of bonds available in India?

If you've experienced this, we know the struggle. 

Keep reading this blog as we break down the different types of bonds to invest in, a step-by-step guide on how to invest, risks in bonds, and why entities even issue bonds– do they have any advantage here?

Popular Types of Bonds Available in India 

In India, there are primarily two types of bonds available for investment: Government Bonds and Corporate Bonds. 

Government Bonds (G-secs and SDL) 

As the name suggests, these bonds are issued by governments and other sovereign entities. It includes; 

1. Government Securities (G-secs) - 

Issued by the Central government and have very low default risk. 

2. State Development Bonds (SDL) - 

Used for infrastructure, state development purposes, or to fulfill budgetary needs. They usually carry a higher interest rate than G-secs. 

3. Sovereign Gold Bonds (SGB) - 

Linked to the price of gold, these sovereign gold bonds are issued by the RBI (Reserve Bank of India) on the government’s behalf. However, currently, they're not issued. 

Corporate Bonds

Issued by the Corporates (or companies) to raise funds for expansion purposes. Mostly, these bonds are ratings-based. Here, AAA is considered to be the safest, followed by BBB or lower as riskier. 

1. Collateral Bonds - 

Think of them as loans taken by companies from investors, backed by collateral (like stocks, bonds, or other assets). In exchange, the company promises a certain % of returns. 

2. Debenture Bonds (or NCDs) - 

Also known as Non-Convertible Debentures, these are fixed-income instruments issued by companies that cannot be converted into equity shares. They may be secured or unsecured and usually offer fixed interest payouts.

3. Zero Coupon Bonds - 

These bonds do not pay regular interest. Instead, they are issued at a discount and redeemed at face value, where the difference becomes the investor's return.

Other Bonds

1. Inflation-Indexed Bonds -

 These bonds are designed to protect investors from inflation, as their returns are adjusted based on inflation rates.

2. Municipal Bonds - 

Issued by local government bodies or municipalities to fund public projects like roads, water supply, and infrastructure development.

3. Capital Gains Bonds -

 These bonds help investors save tax on long-term capital gains under specific sections of the Income Tax Act, provided the gains are reinvested within a defined time period.

Other Bonds Based On Interest & Ratings 

Apart from issuer-based classification, types of investment bonds can also be understood based on how they pay interest and their credit quality. It includes;

Fixed Interest Bonds -

 These bonds offer a fixed rate of interest throughout the investment period, making returns predictable and easier to plan.

Floating Rate Bonds - 

The interest rate changes periodically based on market conditions, which may help in a rising interest rate environment.

Zero-Coupon Bonds - 

These bonds don't pay regular interest and are issued at a discount, with returns earned at maturity.

Perpetual Bonds - 

These bonds don't have a fixed maturity date and provide regular interest payments, but may carry higher risk.

Convertible Bonds - 

These bonds have a feature to be converted into equity shares, offering a mix of fixed income and potential growth.

High-Rated Bonds (AAA/AA) - 

Generally considered more stable, these bonds have relatively lower default risk.

Medium-Rated Bonds (A/BBB) - These may offer slightly higher returns but come with relatively higher risk.

How to Invest in Bonds?

Investing in bonds  can be done through multiple channels, depending on the

 type of bond and your investment preference.

Here's how you can get started:

Step 1. To invest in bonds, having a Demat Account and trading account is mandatory.

Step 2. Choose the Bond Type (between government bonds or corporate bonds, based on your preference.

Step 3. Buy bonds through exchanges like the National Stock Exchange of India or BSE Limited, or via brokers.

Step 4. Use RBI Retail Direct (Optional) for government bonds and invest directly via the Reserve Bank of India platform. 

Some platforms and brokers also provide curated bond options, making it easier to compare yields, ratings, and maturity.

Step 5. After investing, you can choose to either:

• Hold the bond till maturity to receive full value
• Sell it in the secondary market, depending on liquidity. 

What are the Risks in Bonds?

While there are different types of bonds to invest in, they still carry certain risks. It includes;

Credit or Default Risk - 

The issuer may fail to pay interest or repay the principal amount on time.

Interest Rate Risk - 

Bond prices may fall when interest rates rise, especially for long-term bonds.

Liquidity Risk - 

Some bonds may be difficult to sell quickly, resulting in liquidity issues for investors.

Event Risk - 

Unexpected events like mergers, regulatory changes, or financial stress may impact the issuer's ability to repay.

Sovereign Risk - 

In the case of government bonds, there is a risk (though relatively low) that a country may delay or fail to meet its debt obligations.

Conclusion

Bonds come in many forms based on how they pay interest, their maturity period, credit ratings, or whether they are secured or unsecured. 

However, a few popular types of bonds like government bonds, corporate bonds, and key interest-based structures are what most investors focus on. This variety gives investors multiple ways to align their investments with specific financial goals.

So while the bond market offers wide choices, your decision often comes down to a few core factors like risk level, return expectation, and investment horizon. If needed, do consult a professional for more guidance.