Introduction

A bond is a type of fixed income instrument that represents a loan made by an investor to a borrower, typically a government, bank, or corporation. In simple terms, a bond is a debt instrument where the issuer borrows funds from investors and agrees to repay the principal (face value) along with interest payments over a defined period.

In India, bonds are an essential component of the financial markets, offering investors stable returns, capital preservation, and diversification opportunities. Bonds are commonly used by government entities, public sector undertakings (PSUs), banks, NBFCs, and private corporations to raise capital for infrastructure, expansion, or operational needs.

How Does a Bond Work?

• When an investor purchases a bond, they are essentially lending money to the issuer for a fixed term. In return, the issuer commits to paying periodic interest—also known as the coupon—and to return the face value (principal) at the end of the bond's term, also known as the maturity date.
• For example, if a company issues a ₹1 lakh bond with a 7% annual interest rate and a 5-year maturity:
• The investor will receive ₹7,000 as interest every year.
• At the end of 5 years, the investor will get back the ₹1 lakh principal.

Key Features of Bonds

• Face Value (Par Value): The amount the investor will receive at maturity.
• Coupon Rate: The interest rate the issuer agrees to pay on the face value.
• Maturity Date: The date on which the bond will expire and the principal is repaid.
• Issuer: The entity borrowing the funds—can be a government, company, or financial institution.
• Price: Bonds can be issued at face value, at a discount (below face value), or at a premium (above face value).

Why Do Entities Issue Bonds?

Issuing bonds allows governments and companies to:

• Raise large amounts of capital without giving up equity.
• Fund infrastructure projects, business expansions, or public spending programs.
• Maintain cash flow flexibility, as bond repayments are scheduled over time.
• For instance, the Government of India regularly issues G-Secs (Government Securities) and Treasury Bills to finance fiscal needs, while corporations issue debentures or non-convertible debentures (NCDs) to fund operations or expansions.

Types of Bonds in India

• Government Bonds: Issued by the central or state governments. Examples include G-Secs, State Development Loans (SDLs), and Treasury Bills.
• Corporate Bonds: Issued by companies to raise money from the public or institutions.
• PSU Bonds: Issued by public sector undertakings, often offering attractive interest rates and strong creditworthiness.
• Tax-Free Bonds: Issued by government-backed institutions; interest earned is exempt from income tax under Section 10(15)(iv)(h).
• RBI Bonds: Special bonds issued to retail investors by the Reserve Bank of India.
• Municipal Bonds: Issued by local municipal bodies to fund urban infrastructure.

Advantages of Investing in Bonds

• Stable and predictable returns via regular interest payments.
• Lower risk compared to equity investments.
• Capital preservation, especially in government and high-rated corporate bonds.
• Portfolio diversification, balancing volatility from stocks and other market-linked instruments.
• Tax benefits, in some cases, such as with tax-free bonds or infrastructure bonds.

Risks Associated with Bonds

While bonds are considered safer than equities, they do carry certain risks:

• Interest Rate Risk: Bond prices fall when interest rates rise.
• Credit Risk: Risk of default by the issuer, especially in low-rated corporate bonds.
• Liquidity Risk: Some bonds may not be easily sold in the secondary market.
• Reinvestment Risk: Risk that interest payments may not earn as much if reinvested at lower rates.

Bond Market Accessibility

• Stock exchanges (NSE, BSE) for listed bonds and NCDs.
• RBI Retail Direct for purchasing government securities directly.
• Bond distribution platforms offering curated bond portfolios.
• Mutual funds, specifically debt mutual funds, which invest in bonds of varying maturities and credit quality.

Conclusion

A bond is a foundational financial instrument that offers investors a secure and steady income stream while enabling borrowers to raise substantial capital. In the Indian context, bonds serve as a bridge between infrastructure development, corporate funding, and investor wealth creation.

Whether you are a conservative investor seeking fixed returns, or a diversified portfolio builder looking to reduce volatility, bonds remain a vital part of financial planning—provided one understands the terms, risks, and potential returns.