New Delhi [India], November 3: Imagine driving your car down a long highway towards your destination. The car represents your investment portfolio, and the financial markets represent the highway, which is full of ups and downs, curves and sudden bumps. Your destination is essentially your financial goals, based on your age bracket, such as marriage, child education, wealth accumulation, and retirement income.
Now, when the roads are smooth and the economy is strong, you will have a relatively comfortable ride. However, when the road gets bumpy with rough patches and you tend to lose control of your car with the possibility of crashing, that’s when the shock absorbers of your car play an important role. This is where bonds come in.
Bonds: The shock absorbers
While your car’s engine represents your stock, enabling your portfolio to move forward faster, bonds act as shock absorbers, allowing you to have a smoother ride. A well-balanced portfolio strikes a balance between stocks and bonds, helping you drive with greater confidence.
Role of Bonds in the Changing Indian Financial Market
As financial markets swing between volatility and opportunity, bonds are quietly redefining the way India invests. They bring predictability, stability, and compounding power to every portfolio, from first-time investors to retirees.
While retail participation in equities and mutual funds has grown exponentially, the average investor’s portfolio has remained underexposed to fixed income until now. The country’s ₹50 lakh crore corporate bond market is expanding as investors discover that bonds aren’t just for safety, they’re for steady growth. Retail participation in RBI’s Retail Direct App for purchasing bonds has also seen a multi-fold increase in investments in recent times.
Build your long-term wealth with Bonds
Many believe bonds are only for short-term parking of funds. In reality, long-duration bonds can be powerful compounding assets. When bonds are held to maturity and their coupons are reinvested, even a modest 7% to 8% yield can grow substantially over time.
Unlike equity, where returns depend on timing and sentiment, bonds deliver predefined cash flows, and when reinvested, those coupons compound into meaningful wealth over time.
For instance, an investment of ₹10 lakh in an 8% bond can grow to over ₹21.6 lakh in 9 years if interest payments are reinvested – nearly doubling your wealth with minimal risk.
Create a regular secondary income stream with Bonds
Bonds are ideal for those seeking predictable, periodic income.
Most corporate or government bonds pay interest every 6 or 12 months, directly into your bank account. That makes them perfect for:
- Salaried professionals looking to generate passive income
- Retirees needing dependable monthly or annual payouts
- Anyone building a stable cash-flow base
You know how much, when and for how long you’ll be paid, unlike the uncertainty of stock dividends. This reliability makes bonds perfect for creating monthly income ladders; a sequence of maturities ensuring continuous cash inflows over years.
Build a strong foundation for your portfolio as a first-time investor Bonds
If you’re new to investing, bonds are a gentle entry point into the world of markets.
- Simple to understand; i.e. fixed return, fixed maturity
- Rated by independent agencies (CRISIL, ICRA, CARE, etc.)
- Available in small ticket sizes starting at Rs 10,000 through multiple online bond platforms and intermediaries
- Lower volatility compared to equities or mutual funds
Bonds help first-time investors preserve capital, build confidence and consistency before exploring higher-risk assets.
Plan your retirement without worrying about capital erosion through bonds
Retirement planning isn’t just about saving; it’s about creating certainty.
Bonds help you:
- Lock in known interest rates for future years for a steady monthly income for your daily needs
- Match maturities with life goals
- Child’s Higher Education
- Child’s marriage
- Your retirement travel plans
- Unforeseen medical expenditures
- Preserve capital while generating cash flow
You can build a bond ladder by investing in multiple maturities (1–3–5–10 years), thereby ensuring regular inflows as older bonds mature and new ones replace them. Using the laddering technique, retirees can align payouts with their expenses while maintaining liquidity.
Experience the Magic of Compounding not just with SIPs but also with Bonds
When you reinvest your interest income received from bonds, your returns begin to earn returns. That’s the power of compounding.
Even modest interest rates can create large outcomes over time:
| Annual Return | 10 Years | 20 Years | 30 Years |
| 7% | ₹1 → ₹1.97 | ₹1 → ₹3.87 | ₹1 → ₹7.61 |
| 8% | ₹1 → ₹2.16 | ₹1 → ₹4.66 | ₹1 → ₹10.06 |
Reinvesting your coupon income, even partially, can dramatically accelerate long-term wealth creation.
Understanding tax implications with Bonds
Be it any financial asset class, tax treatment eventually determines how much of your interest or returns you actually keep. While bond interest is taxed at the investor’s slab rate, long-term capital gains (after 12 months) on listed bonds are taxed at just 12.5%.
Additionally, tax-free PSU bonds from issuers like NHAI, PFC, and REC (AAA rated) offer completely exempt coupon income, often yielding 5.5% to 6% tax-free, which comes to pre-tax 8.25% – 8.5% for investors in the highest tax bracket.
| Type | Taxation | Key Point |
| Coupon | Interest Income | Taxed at your slab rate. Declared as “Income from Other Sources |
| Capital Gains (Sold Before Maturity) | <12 months → Short-term (slab rate)
>12 months → Long-term (12.5%) |
Plan your holding period strategically |
| Tax-Free Bonds (PSU) | Fully tax-exempt interest | Effective post-tax yield is often 5.5% to 6%, risk-free |
| Market-Linked Debentures (MLDs) | Taxed at slab rate (since 2023) | Choose only if aligned with your tax bracket |
Pro Tip: For investors in higher tax brackets, tax-free PSU bonds often outperform post-tax FD returns.
Bonds vs. Debt, Mutual Funds vs. Fixed Deposits
| Featured Bonds | Debt Mutual Funds | Fixed Deposits | |
| Return Type | Fixed | Market-linked | Fixed |
| Transparency | High | Moderate | High |
| Risk | Credit & interest rate risk | Market & credit risk | Very low |
| Liquidity | Tradable on the exchange | T+1 redemption | Premature withdrawal penalty |
| Ideal for | Stability + diversification | Active management | Short-term savings
|
Key Insight:
- FDs offer safety but limited flexibility.
- Debt mutual funds add liquidity but depend on the fund manager’s skill.
- Bonds give you control with fixed income, a fixed timeline, and known risk.
Why every portfolio needs Bonds
While bonds may not deliver eye-catching returns as equities, they offer steady income, lower risk, and crucial diversification benefits. For retail investors, especially those planning for retirement, education, or long-term financial security, including bonds in their portfolio can significantly improve their overall risk-adjusted returns.
In the long run, a well-diversified portfolio with the right mix of equities and bonds paves a path for higher returns and financial resilience.
Through online bond platforms and intermediaries, investors can:
- Receive transparent information on government and corporate bonds
- Compare yields, ratings, and maturities and decide on products based on their goals
- Expect a seamless sales and post-sales process
Whether you’re building wealth, planning retirement, or just starting, bonds can anchor your financial journey. So, start investing in bonds before it’s too late.
This article is written by Mr Umesh Tulsyan, Managing Director of Sovereign Global Markets Pvt Ltd, a Delhi-based financial boutique, based on his independent research and thorough understanding of the Indian Debt Markets. Umesh brings with him over 25 years of experience in the financial services industry. The views expressed here are entirely personal and should not be construed as any investment advice.
Disclaimer: This press release is for informational purposes only and does not constitute financial advice. Investments involve risk, and past performance is not indicative of future results. Readers should conduct their own research or consult with a qualified advisor before making any decisions.
