Bonds & Debentures
Lend money, earn fixed interest. Understand yields, credit ratings and the real risks.
When you buy a bond, you are lending money to a government or a company. They promise to pay you a fixed interest (coupon) and return the principal on a set date. Bonds are quieter than stocks but they are not risk-free.
🏛️The main types
Where the bond comes from decides both the safety and the return.
- G-Secs — Issued by the Government of India. Safest possible. ~7% p.a.
- Corporate bonds / NCDs — Issued by companies. 8–11% p.a. depending on credit rating.
- Tax-free bonds — PSU-issued, interest exempt from income tax. Great for the 30% slab.
- SGBs (Sovereign Gold Bonds) — Linked to gold price + 2.5% p.a. interest. RBI-issued.
📈Yield is not coupon
Coupon is the fixed % the bond pays on face value. Yield is what you actually earn based on the price you pay.
- YTM — Yield to Maturity: the true annualised return if you hold till the end.
- Price vs yield — They move opposite. When interest rates rise, bond prices fall.
🛡️Credit ratings and real risks
CRISIL, ICRA and CARE grade bonds from AAA (safest) down to D (default). Higher yield usually means lower rating.
- Credit risk — Issuer may fail to pay. Stick to AAA / AA for safety.
- Interest-rate risk — Rising rates lower the resale price of long-tenure bonds.
- Liquidity risk — Small corporate bonds can be hard to sell mid-way.
Risk & 5-Year Returns
How these compare
Indicative 5-year CAGR (2020–2025) and typical risk for the instruments discussed in this topic.
| Instrument | 5Y CAGR | Risk |
|---|---|---|
Debt Mutual Funds Interest-rate & credit risk. Taxed at slab (post-Apr 2023). | 5–7% | Low–Medium |
Corporate Bonds (AAA) Credit risk rises sharply below AA. | 7–8.5% | Low–Medium |
Past returns do not predict future results.
See full comparison on Portfolio →Micro Pro Tips
- 🔎Read the rating, not the ad — A '12% NCD' from a BB-rated issuer can default. A 7.5% G-Sec won't.
- 🪜Ladder your maturities — Split across 1, 3, 5-year bonds so you always have something maturing.