“Bonds” are not a single type of investment. They're a broad category of instruments with very different risk, return and tax characteristics. Here are the eight worth knowing.
1. Government Bonds (G-Secs)
Issued by the Central Government, Government Securities (G-Secs) are generally considered the safest bonds in the Indian market. Because they are backed by the sovereign, G-Secs typically do not carry domestic credit ratings. Yields are correspondingly lower, often in the 6–7% range. G-Secs are also commonly accepted as collateral for derivatives (F&O) trading margin.
2. State Development Loans (SDLs)
State Development Loans (SDLs) are the state-government equivalent of G-Secs and are used to fund state budgets. They are generally viewed as very low-credit-risk investments and typically offer slightly higher yields than comparable G-Secs.
3. Municipal Bonds (“Muni Bonds”)
Issued by municipal bodies and local government entities, municipal bonds help finance projects such as roads, public transport systems, water infrastructure and urban development. While still a relatively small market in India, municipal bond issuance has grown in recent years as more cities access capital markets directly.
4. Public Sector Undertaking (PSU) Bonds
Issued by companies in which the government holds more than 50% ownership, including entities such as NHAI, REC and ONGC. These bonds are often highly rated and may offer higher yields than Government Securities because they are backed by government-owned companies rather than the sovereign itself.
5. Corporate Bonds
Issued by private companies to fund their operations and growth, corporate bonds are the largest and most diverse part of the listed bond market. Ratings can range from AAA to below investment grade, with yields often ranging from about 7% to 14% or more depending on credit quality. This is also where credit ratings become especially important, since higher yields often come with higher credit risk.
6. Tax-Free Bonds
Certain PSU entities issue bonds whose interest income is fully exempt from income tax, a feature unavailable in conventional FDs, corporate bonds or debt mutual funds. These bonds are typically issued during specific windows and then trade on exchanges thereafter.
7. Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds (SGBs) are government-backed securities linked to the price of gold. In addition to any change in gold prices, SGBs pay a fixed 2.5% annual interest, something physical gold and most gold exchange-traded funds (ETFs) do not offer. Listed SGBs can also be bought and sold on the National Stock Exchange and Bombay Stock Exchange like other listed securities.
8. Callable and Convertible Bonds
These are bond features rather than standalone categories of bonds. Callable bonds allow the issuer to repay the bond before maturity, typically when interest rates fall and refinancing becomes cheaper. Because of this extra flexibility for the issuer, callable bonds often offer slightly higher coupon rates than comparable non-callable bonds. Convertible bonds can be converted into a predetermined number of the issuer's shares, giving investors some of the potential upside of equity while retaining bond characteristics.
Matching type to goal
- Maximum safety, yield secondary → G-Secs or SDLs
- Best balance of risk and return → high-quality rated corporate bonds
- Tax efficiency → tax-free bonds, or 54EC bonds for eligible property-related capital gains
- Diversification into a different asset → Sovereign Gold Bonds
- Collateral for trading → Government bonds specifically