How to Invest and Buy Bonds in India: The Ultimate Guide for Indian Investors

In the recent years, more and more investors in India have started looking beyond traditional options like stocks and fixed deposits and got into including bonds in their portfolio to diversify their investments and earn returns in a risk-optimized manner. The bonds market in India has grown over 70% in the last five years.

As more and more people recognize the benefits of investing in bonds, it’s important to explore how you can navigate the bonds market and participate in investing in bonds. This guide will walk you through the essentials of bonds and provide a step-by-step guide on how to invest in them.

What are Bonds?

Think of a bond as a straightforward deal between two parties, you and the borrower. When you buy a bond, you’re lending money to the issuer, who agrees to pay back the principal amount and regular interest at a fixed rate. Like a loan, but one that comes with a formal contract.

Bonds are a popular way for organizations like PSUs, government bodies, and corporations to raise money. They might use the funds to build infrastructure, expand their business, or even cover short-term expenses. As an investor, you’re helping them achieve these goals while earning returns of up to 14%.

Types of Bonds Available in India

• Government Bonds: Government bonds, or “G-secs” in India, are debt securities issued by national governments to fund various public expenditures. These bonds are typically considered low risk because they are backed by the government’s credit. They usually offer fixed interest payments and have a range of tenures, from short-term (a few months) to long-term (5-40 years). Government bonds are ideal for conservative investors seeking stable, long-term returns with minimal risk.
• Corporate Bonds: Corporate bonds are issued by companies to raise capital for expansion or operational costs. They generally offer higher interest rates than government bonds due to the higher risk associated with the issuing company’s financial health. These bonds typically have tenures ranging from 1 to 30 years. Suitable for investors with a moderate risk tolerance, corporate bonds can be a good choice for those looking for higher returns but willing to accept more risk.
• Municipal Bonds: Issued by local or state governments, municipal bonds finance public projects like infrastructure and community services. These bonds may offer tax exemptions on the interest earned, making them attractive to high-income investors in certain regions. The tenure for municipal bonds can vary from short-term to long-term, and they are typically suitable for conservative investors seeking steady, tax-advantaged income.
• High-yield Bonds (Junk Bonds): High-yield bonds, also known as junk bonds, are issued by companies with lower credit ratings, reflecting higher risk. Due to their greater default risk, they offer higher interest rates to attract investors. These bonds are better suited for risk-tolerant investors seeking higher yields in exchange for greater risk.
• Investment-grade Bonds: These bonds are issued by companies or governments with strong credit ratings (BBB or higher). They offer lower yields compared to high-yield bonds but are considered safer, making them attractive for conservative investors. Investment-grade bonds typically have a medium-to-long-term tenure and are ideal for investors looking for stable income with a lower default risk.
• Treasury Bills (T-bills): Treasury Bills are short-term government debt instruments that mature in less than a year, usually 91, 182, 364 days. They are sold at a discount and do not pay interest, but the difference between the purchase price and the face value at maturity is the investor’s return. T-bills are low-risk investments suitable for short-term investors or those seeking a safe place to park their money for a short period.
• Zero-coupon Bonds: These bonds are issued at a discount to their face value and do not make periodic interest payments. Instead, the investor receives the full-face value at maturity. The tenure of zero-coupon bonds can range from 10 to 15 years. They are suitable for long-term investors looking for a lumpsum payout at maturity, often used for funding future goals like education or retirement.
• Convertible Bonds: These bonds can be converted into a company’s stock at a predetermined price, providing the potential for capital appreciation if the company’s stock price rises. Convertible bonds generally have medium-to-long-term tenures and offer a lower interest rate than non-convertible bonds because of their added conversion feature. These bonds are suitable for investors looking to balance fixed income with the potential for equity growth.
• Inflation-linked Bonds: These bonds are designed to protect investors from inflation by adjusting the principal and interest payments according to inflation rates, typically linked to indices like the Consumer Price Index (CPI). They can have short-to-the-long-term tenures and are ideal for investors who are concerned about inflation eroding their returns, offering a safer investment during times of rising inflation.

Benefits of Investing in Bonds

Here are two additional benefits of investing in bonds:

1. Tax Benefits: Certain types of bonds, such as tax-free bonds issued by Public Sector Undertakings (PSUs), offer tax exemptions on the interest earned, making them an attractive option for tax-conscious investors.
2. Credit Rating Transparency: Bonds typically come with credit ratings from agencies like CRISIL or ICRA, helping investors assess the risk level and make more informed investment decisions based on the issuer’s financial health.

Step-by-Step Guide: How to Invest in Bonds in India

There are several ways to invest in India. Investors can purchase government bonds such as savings bonds, treasury bills, and/or sovereign gold bonds directly from banks or post offices. Corporate bonds and debentures can be purchased through brokers or financial institutions. Additionally, investors can invest in bond funds and ETFs, which pool money from multiple investors to buy a variety of bonds.

With the rise of technology and emergence of online platforms, buying bonds has become even easier, offering a convenient and user-friendly experience. Platforms like Jiraaf provide a simple interface for investing in government and corporate bonds, assessing risks and streamlining the process while ensuring compliance through a mandatory KYC verification. Here are a few basic steps to complete the KYC process, ensuring a seamless investment experience:

Step 1: Fill in the Basic Details

You start by providing general information about yourself. This typically includes essential personal details that help establish your identity and move the process forward.

Click Continue to proceed. 

Step 2: ID Verification

PAN Verification

Keep a soft or physical copy of your PAN card handy. 

• For the physical copy, capture the front side of your PAN card. When capturing the PAN card, hold it in your hand, slightly below your chin, for a clear view, or simply upload the soft copy from your device.
• Review the PAN card details again before proceeding to the next step.

Aadhaar Verification
You’ll be redirected to the Digi locker page. 

• Enter your Aadhaar number, captcha, and the OTP received on your Aadhar-linked mobile number. Then click Allow to share details.

Step 3: Add Additional Details 

• Provide information like Marital Status, Father/Spouse’s Name, and Occupation Type.

Step 4: Bank Account Details

• Add your bank account details and click Continue. Verify the details via UPI or direct bank account information.

Step 5: Demat Account Details 

• Enter your Demat account details as prompted.

Step 6: Identity Confirmation 

• Allow camera and location access on your device for photo verification
• Stay still until the circle turns green, then capture your photo
• Next, digitally sign by following the instructions provided

Step 7: Final Steps

• Review your KYC form and confirm all details
• Generate the final document, enter your Aadhaar number, and wait for the OTP
• Once you enter the OTP, your KYC submission is complete

Platforms through which you can Buy Bonds in India

There are plenty of options, and the right one for you depends on how hands-on you want to be:

• Stock Exchanges (NSE/BSE): You can buy bonds just like stocks through a broker.
• Online Platforms: Websites like GoldenPi, Jiraaf, BondsIndia, and others make bond investing simple and digital.
• Banks: Some banks offer bonds directly to their customers as part of their investment products.
• Mutual Funds/Debt Funds: If picking individual bonds feels overwhelming, you can invest in bond funds instead.

Key Factors to Consider Before Investing in Bonds

Before you hit the “buy,” button. here are a few things to think about:

• Credit Ratings: Always check the issuer’s credit rating to gauge the risk involved.
• Yield vs. Interest Rate: Understand whether the return offered aligns with your investment goals.
• Tenure: Always assess the tenure you are willing to lock in your money, keeping in mind your liquidity needs and financial goals.
• Tax Implications: Some bonds are more tax-friendly than others, so consider your tax bracket.

Common Mistakes to Avoid When Buying Bonds

Even experienced investors slip up sometimes. Here are some common pitfalls to steer clear of:

• Ignoring Credit Ratings: Chasing high returns without checking the issuer’s credibility can lead to trouble.
• Overconcentration: Don’t put all your money in one bond or even one type of bond. Diversification is the key.
• Not Understanding the Terms: Read the fine print carefully, especially the interest rate and maturity date.
• Selling Too Soon: Bonds are typically long-term investments. Selling early can hurt your returns.

Final Thoughts on How to Invest in Bonds

Diversification is the key to building a resilient investment portfolio, and bonds are an essential component of it. Bonds offer a safer option with steady and predictable returns, making them ideal for stability and income. By understanding the various types of bonds and investment platforms, you can make informed decisions and enhance the security and balance of your portfolio.

FAQs about Investing in Bonds in India

What is the Minimum Amount Needed to Invest in Bonds?

Government bonds can be purchased with a minimum investment as low as ₹1,000, depending on the specific bond issue. For corporate bonds, the minimum investment typically ranges from ₹1,000 to ₹1,00,000, depending on the issuer and the terms of the offering.

Are Bonds Risk-free Investments?

Bonds are not entirely risk-free. While government bonds, particularly those from stable governments, are considered low-risk, corporate bonds carry some degree of credit risk. It typically has lesser risks than equities. It’s essential to assess the credit rating of the bond issuer before investing.

How Do I Earn Returns from Bonds?

Returns from bonds come in two forms: regular interest (also known as coupon payments) and potential capital gains. You earn interest through periodic payments made by the issuer, and you can sell the bond at a higher price if its capital market value rises.

Can NRIs Invest in Indian bonds?

Yes, Non-resident Indians (NRIs) are allowed to invest in Indian bonds, subject to regulations set by the Reserve Bank of India (RBI). They must adhere to specific guidelines and may need to open an NRI account for this purpose.

How are Bonds Taxed in India?

The interest earned on most bonds is taxed according to the investor’s income tax slab. However, tax-free bonds issued by public sector undertakings (PSUs) are exempt from tax on the interest income, making them a tax-efficient investment option.