Bonds and Fixed Income Investing in India: G-Secs, Corporate Bonds, and How It All Works

Most Indian investors treat "debt" as a catch-all for anything that isn't equity — FDs, debt mutual funds, maybe PPF. But the actual fixed income market is much larger than that, and understanding it properly changes how you think about the debt portion of your portfolio.

Let me walk you through how bonds actually work — pricing, yield, risk, and how you can access this market as an individual in India.

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What a Bond Actually Is

A bond is a loan. You lend money to the issuer (government, corporation, bank), they pay you interest (called the coupon) at fixed intervals, and return your principal at maturity.

The basic parameters of any bond:

• Face value (par value): The principal amount — typically ₹1,000 for Indian government bonds
• Coupon rate: The annual interest rate on face value. A 7% coupon on ₹1,000 face = ₹70/year
• Maturity: When the principal is repaid — could be 91 days (T-bill) or 40 years (long-dated G-sec)
• Yield: The return you actually earn based on what you paid for the bond — not the same as coupon rate

The coupon is fixed at issuance. The yield changes as market prices move.

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The Most Important Concept: Price and Yield Move Opposite

This trips up a lot of people, so let me be direct: when bond prices rise, yields fall. When bond prices fall, yields rise. They always move in opposite directions.

Here's why. Suppose a bond has a face value of ₹1,000 and pays a ₹70 coupon (7% coupon rate). If market interest rates rise to 8%, nobody wants a 7% bond at ₹1,000. Its price will fall — say to ₹875. Now the buyer earns ₹70 on ₹875 invested, which approximates an 8% yield. The coupon hasn't changed; the price adjusted to make the yield competitive.

Conversely, if rates fall to 6%, that 7% bond is attractive. Its price rises — maybe to ₹1,167. Now the buyer earns ₹70 on ₹1,167, which approximates a 6% yield.

This is why long-duration bonds are risky even though they're called "fixed income." If rates rise unexpectedly, bond prices drop. The longer the maturity, the bigger the price swing.

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Types of Bonds in India

Government Securities (G-Secs) Issued by the central government. Zero credit risk — the government can always print rupees (though that has its own implications). Maturities range from 91 days to 40 years. The benchmark 10-year G-sec yield is widely quoted and watched as an indicator of interest rate expectations.

State Development Loans (SDL) Issued by state governments. Slightly higher yield than G-secs (usually 25–50 bps) to compensate for marginally higher credit risk. Still government-backed and very safe.

Treasury Bills (T-Bills) Short-term government instruments — 91-day, 182-day, 364-day. Issued at a discount to face value, redeemed at face value. No coupon — your return is the difference between purchase price and ₹100 face value.

Corporate Bonds Issued by companies to raise debt. HDFC, Bajaj Finance, NTPC, Tata Capital — all issue corporate bonds. Higher yield than G-secs to compensate for credit risk. Rated by agencies like CRISIL, ICRA, CARE — look for AAA or AA+ for reasonable safety.

PSU Bonds Public sector undertakings like NHAI, REC, PFC issue bonds. Generally considered quasi-sovereign with yields slightly above G-secs. NHAI bonds under Section 54EC are specifically useful for capital gains exemption (₹50L limit, 5-year lock-in).

Sovereign Gold Bonds (SGBs) Technically bonds — issued by RBI, denominated in grams of gold, 8-year maturity. 2.5% annual interest plus gold price appreciation. I've covered these in a separate post, but they fit the fixed income category.

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Duration: Why Maturity Alone Isn't Enough

When you're choosing between two bonds with different maturities, maturity alone doesn't tell you the full interest rate sensitivity. Duration is a better measure.

Duration measures how long, on average, it takes to receive your cash flows — weighted by present value. A bond with many coupon payments before maturity has shorter duration than a zero-coupon bond of the same maturity.

Modified duration tells you the approximate % price change for a 1% change in yields:

• Bond with modified duration of 5: a 1% rise in rates → ~5% fall in price
• Bond with modified duration of 10: same 1% rise → ~10% fall in price

For conservative investors who need stability, shorter duration is better — less price volatility if rates change. For investors who want to benefit from falling rates (a rate-cut cycle), longer duration amplifies the price gain.

Most debt mutual funds report their portfolio duration. A short-duration fund is 1–3 years, medium is 3–4 years, long-duration is 7+ years. In a rising rate environment, you want short duration. When rates are near their peak and cuts are expected, longer duration lets you ride the price appreciation.

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Credit Risk: The Other Risk in Bonds

Interest rate risk gets most attention, but credit risk matters too — especially in corporate bonds.

Credit risk is the possibility that the issuer defaults on coupon payments or principal repayment. This is why DHFL bonds, which many investors held thinking "they're AAA," caused massive losses when the housing finance company collapsed.

Credit rating categories:

• Investment grade: AAA, AA+, AA, AA-, A+, A, A-, BBB+ and below BBB → considered investment grade minimum threshold
• Below investment grade (speculative): BB, B, C, D — higher yield but substantial default risk

The yield difference between a G-sec and a corporate bond of the same maturity is called the credit spread. AAA corporate bonds might yield 50–75 bps above G-secs. Lower-rated bonds yield more.

Lesson: Don't reach for yield by moving down the credit quality ladder without understanding what you're getting. The extra 1% yield on a BBB bond isn't worth the risk of a 30–40% loss on default.

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Yield Curve: What the Shape Tells You

The yield curve plots yields against maturities — from 3-month T-bills to 30-year G-secs. Normally, it slopes upward: longer maturity = higher yield (to compensate investors for more uncertainty over a longer period).

Normal/upward sloping: Short rates < long rates. Economy is growing, inflation expectations are normal.

Flat: Short and long rates are similar. Transition period.

Inverted: Short rates > long rates. This is unusual and often signals markets expect rate cuts ahead — sometimes associated with recession fears. The US yield curve inverted before the 2008 and 2020 recessions.

In India, the RBI's monetary policy decisions have the most direct impact on short-term rates (the repo rate). Long-term yields are more influenced by inflation expectations, government borrowing, and global rates.

When RBI cuts rates, short-term rates fall first. If the market believes cuts will continue, long-term rates also fall — and long-dated bond prices rise significantly. This is why debt fund categories like "Gilt with 10-year constant maturity" perform well during rate-cut cycles.

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How to Actually Invest in Bonds as an Individual

Debt mutual funds — the easiest route. You get professional management, diversification, and liquidity. Categories: liquid, short duration, medium duration, long duration, gilt, credit risk. Match the category to your holding period and risk tolerance.

RBI Retail Direct — the RBI's platform (rbidirect.org.in) lets you buy G-secs, T-bills, and SDLs directly with no intermediary. Minimum investment is ₹10,000 for G-secs. No demat account required beyond the RBI Retail Direct account. Excellent for long-term investors who want sovereign exposure without fund expenses.

Stock exchanges — Listed bonds can be bought through your broker's demat account. Many PSU bonds, corporate bonds, and SDLs are listed on NSE/BSE.

Bonds platforms — Apps like Indiabonds, BondsIndia, GoldenPi aggregate corporate bonds, PSU bonds, and SDLs. Better access to individual bonds than calling a broker.

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Tax on Bonds

Interest income from bonds (coupon) is added to your total income and taxed at slab rate — same as FD interest. No special treatment.

Capital gains on bond sale:

• Listed bonds: LTCG (held > 12 months) at 12.5%. STCG at slab rate.
• Unlisted bonds: LTCG (held > 24 months) at 12.5%. STCG at slab rate.

Debt mutual funds purchased after April 1 2023: taxed at slab rate regardless of holding period — the indexation benefit is gone.

SGBs held to maturity: tax-free. Sold before maturity on exchange: same capital gains rules as listed bonds.

The tax efficiency of bonds has reduced significantly post-2023 for most categories. If you're in a high tax bracket, compare the post-tax yield carefully before choosing bonds over other fixed income instruments.

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When Bonds Make Sense in Your Portfolio

Bonds serve a specific function: they reduce portfolio volatility and provide a stable component when equity markets are crashing. The reason to hold debt is not to maximize returns — it's to reduce the anxiety of watching your entire portfolio fall 40% in a correction.

For most Indian retail investors in the 30–50 age range, the practical approach:

• Emergency fund and short-term money (< 2 years): Liquid funds, short-duration funds, or FDs. Not long-dated bonds.
• Medium-term goals (3–5 years): Short to medium duration funds or 3–5 year G-secs on RBI Retail Direct.
• Long-term portfolio stability: A 20–30% debt allocation via gilt funds or medium-duration funds, rebalanced annually against your equity holdings.

The goal isn't to beat equity returns with bonds. It's to have dry powder that holds its value when equity is down — so you can rebalance at the bottom, not panic-sell.