Bonds come in different types, each designed for specific needs, risk levels, and investment goals. This guide explains the most common bond categories in India and how they differ.
One fine day, Mr. Financewala steps out for a walk and finds himself standing on a newly built bridge in his area. It’s clean, well-constructed, and clearly built to last. As he walks, he overhears a group nearby discussing how the local municipal body raised funds for this project through bonds.
Mr. Financewala pauses.
Until now, he had understood bonds as something companies use to raise capital, or governments use to fund large-scale projects. It all made sense in theory.
But this was something tangible. Something he could see, stand on, and experience in real life.
On his way back, Mr. Financewala kept thinking, “which bond helped build this? Who issued it? Can investors like me invest in something like this? And where would I even find these bonds?”
That day, Mr. Financewala realized that bonds are not just limited to government or corporate issuances. There are multiple types of bonds, each with its own purpose, structure, and role.
In the second chapter of our bond basics series, we will explore the major types of bonds available in the Indian market, how they differ, and where each of them fits.
What are the Different Types of Bonds?
Exploring different types of bonds can put you down a rabbit hole quite quickly. There are far more categories and variations than most investors initially expect.
To keep things simple and approachable, let’s focus on the most common types of bonds you’re likely to come across as you move ahead in your bond investing journey.
What are Government Securities?
Government securities, or G-secs, are bonds issued by the government to raise funds for infrastructure, public spending, and managing fiscal needs. These bonds have versatile durations, meaning they can be issued for 91 days or even 40+ years.
G-secs play a key role in the nation’s financial ecosystem. They act as:
- Benchmark for other debt instruments
- Tool for monetary policy transmission
- Safe haven for capital preservation
- Indicator of economic health of a nation
Within government securities, there are different types based on duration and structure.
Government Bonds
Government bonds are a subset of government securities. Like all G-secs, they come with sovereign backing, which adds a layer of reliability.
Some of the common types of government bonds include:
- Fixed-rate Bonds
These bonds offer a constant interest rate throughout their tenure, providing predictable income.
- Floating Rate Bonds (FRBs)
The interest rate on these bonds changes periodically based on a benchmark, helping align returns with market conditions.
- 7.75% GOI Savings Bond
A government-backed savings instrument that offers a fixed interest rate (historically 7.75%), designed primarily for retail investors.
- Zero-coupon Bonds
These bonds do not pay periodic interest; instead, they are issued at a discount and redeemed at face value upon maturity.
So, while the sovereign backing remains the same, the way returns are structured can vary quite a bit across these bonds.
Treasury Bills (T-Bills)
If you’re looking at short-term debt options, treasury bills or T-bills are one of the most common choices amongst retail and institutional investors.
These are short-term government instruments with maturities ranging from 91 days to 364 days. Unlike traditional bonds, they do not pay periodic interest. Instead, they are issued at a discount and redeemed at face value, with the difference acting as your return.
T-Bills are typically used for short-term capital allocation, offering high liquidity and relatively low risk.
State Development Loans (SDLs)
State development loans are bonds issued by individual state governments to fund their development and budgetary requirements.
They function similarly to central government bonds but often offer slightly higher yields, making them an attractive option if you seek better returns than other G-secs while maintaining a relatively stable risk profile.
Municipal Bonds
Municipal bonds are issued by local governing bodies, such as municipal corporations, to fund infrastructure projects like roads, bridges, and water systems.
When you invest in these bonds, you’re essentially contributing to the development of public infrastructure, while earning regular interest income in return.
For Mr. Financewala, this is where his thoughts circle back to the bridge he stood on earlier.
These bonds also offer a layer of diversification, as their performance is tied to local development projects.
Inflation-linked Bonds
Inflation-linked bonds are designed to address one key concern: the impact of inflation on your returns.
In these bonds, both the principal and interest payments are adjusted based on inflation, ensuring that your investment maintains its real value over time.
This makes them particularly relevant for long-term planning, where preserving your wealth becomes more important than growing it.
So far, we’ve looked at bonds issued by the government. But bonds aren’t limited to government bodies alone. Companies can issue them too.
What are Corporate Bonds?
Corporate bonds are issued by companies to raise capital for business expansion, operations, or new projects. When you invest in one, you’re essentially lending money to the company, which, in return, pays you regular interest and repays your principal at maturity.
Compared to government bonds, corporate bonds typically offer higher yields. This is because the risk is linked to the company’s ability to repay, and unlike government securities, corporate bonds don’t carry sovereign backing. Simply put, higher perceived risk often comes with higher return potential.
A general advice is to go for investment-grade corporate bonds that are rated between AAA and BBB-, indicating relatively strong credit quality. These ratings are assigned by credit rating agencies like CRISIL, ICRA, CARE Ratings, and India Ratings, which evaluate a company’s financial health and repayment capacity. which evaluate a company’s financial health and repayment capacity.
If you are looking to balance returns with relative stability, investment-grade corporate bonds often sit in a sweet spot. Platforms like Jiraaf make it easier to access such opportunities by curating bonds within this category and offering returns in the range of 8% to14%, depending on the issuer, tenure, and market conditions.
Conclusion
As Mr. Financewala walks back home and finds himself reaching for his phone. What started as a simple curiosity now turns into a quick search. He begins reading about different types of bonds, how they work, and where they fit. Naturally, he starts thinking of ways to invest in bonds.
But as he begins to look at actual bond listings, something catches his attention. He notices that some bonds were issued at one price but are now trading at a different price, sometimes higher, sometimes lower.
And that raises a new question.
If the returns are fixed, why do prices change? And more importantly, what does that mean for you as an investor?
In the next chapter, we break down how bond pricing works in the market, understanding concepts like premium, par, and discount, so you know not just what to buy, but at what price.
