Unsecured Bonds

Unsecured Bonds, also called unsecured debentures, are fixed-income instruments not backed by collateral. Unlike secured bonds, where specific assets are pledged as security, unsecured bonds rely entirely on the issuer's creditworthiness and reputation. In India, these are commonly issued by corporates and financial institutions as a way to raise debt without providing any security.

• No Collateral Support: Investors depend solely on the issuer's ability to repay.

• Higher Risk, Higher Yield: Since there is no security, yields are typically higher than secured bonds.

• Issued by Corporates & NBFCs: Popular among companies seeking flexible funding options.

• Credit Rating Dependent: Ratings from CRISIL, ICRA, CARE, and India Ratings help investors gauge risk.

• Can Be Senior or Subordinated: Senior unsecured debt ranks higher in repayment order compared to subordinated debt.

When you buy unsecured bonds, you lend money to the issuer without any claim on specific assets. The issuer promises to pay periodic interest (coupon) and principal at maturity. If the issuer defaults, repayment depends on residual assets and ranking of debt in liquidation — senior unsecured debt holders are paid before subordinated debt holders, but after secured creditors.

• Attractive Returns: Usually offer better yields compared to secured bonds.

• Flexible Options: Widely available in multiple tenures and coupon structures.

• Portfolio Diversification: Helps investors balance between high-security and high-yield instruments.

• Accessible in Secondary Markets: Many unsecured bonds are listed and tradable on exchanges.

• Higher Credit Risk: No collateral backing means higher exposure to default.

• Rating Sensitive: A downgrade in the issuer's rating can sharply impact bond prices.

• Lower Recovery in Default: Secured creditors are prioritized over unsecured bondholders.

• Taxable Interest: Interest earned is fully taxable as per the investor's income tax slab.

Ideal For:

• Investors seeking higher yields than secured bonds.

• Moderate-to-aggressive investors are comfortable with some credit risk.

• Those diversifying fixed-income portfolios with a mix of security levels.

Not Ideal For:

• Very conservative investors prioritizing safety over returns.

• Individuals unwilling to take credit/default risk.