Imagine driving a car down a highway to your destination where the car represents your portfolio and the highway represents the financial markets, full of ups, downs, curves and sudden bumps.
Now, when the roads are smooth and the economy is strong, you ride is comfortable. However, when the road gets bumpy, you tend to lose control of your car. That’s when the shock absorbers play an important role. This is where bonds come in.
Bonds: The shock absorbers
While your car’s engine represents stocks enabling your portfolio to move faster, bonds enable you to have a smoother ride. A well-balanced portfolio creates a balance between both to help you driver faster with comfort.
Role of Bonds in the Indian Financial Market
As retail participation in equities and mutual funds grows exponentially, the average investor’s portfolio remains 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. Participation in RBI’s Retail Direct App for purchasing bonds has seen a multi-fold increase.
Create a regular secondary income with Bonds
Bonds are ideal for those seeking predictable and periodic income.
Most 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 periodic payouts
- Anyone building a stable cash-flow base
You know how much, when and for how long you’ll be paid.
Build a strong portfolio as a first-time investor in Bonds
If you’re new to investing, bonds are an entry point into the world of markets.
- Fixed return, fixed maturity
- Rated by independent agencies (CRISIL, ICRA, etc.)
- Investments starting as low as Rs 10,000
- Lower volatility compared to equities or mutual funds
Bonds help investors preserve capital, build confidence and consistency before exploring higher-risk assets.
Plan your retirement without worrying about capital erosion
Retirement planning isn’t just about saving; it’s about creating certainty.
Bonds help you:
- Lock in known interest rates for future with a steady income for your daily needs
- Match maturities with your life goals
- Preserve capital while generating cash flow
You can build a bond ladder by investing in multiple maturities (1–5–10 years), thereby ensuring regular inflows as older bonds mature and new ones replace them. Using 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, your returns begin earning 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 interest income, even partially, can dramatically accelerate long-term wealth creation.
Understanding tax implication with Bonds:
While interest is taxed at investor’s slab rate, long-term capital gains on listed bonds are taxed at just 12.5%.
Tax-free PSU bonds from issuers like NHAI, PFC, REC, etc. (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) | lt;12 months → Short-term (slab rate) |
| 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%)
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 | Interest rate & default risk |
| Liquidity | Tradable on exchange | T+1 redemption | Premature withdrawal penalty |
| Ideal for | Stability + diversification | Active management | Short-term savings |
Why every portfolio needs Bonds:
While bonds may not deliver eye-catching returns as equities, they offer steady income, lower risk, and diversification benefits. For retail investors, including bonds in their portfolio can 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.
Whether you’re building wealth, planning retirement, or starting out; bonds can anchor your financial journey. So, start investing in bonds before it’s too late.
- Umesh Tulsyan, MD, Sovereign Global Markets Pvt Ltd, Delhi (25 years in bond markets)
Disclaimer: No Business Standard Journalist was involved in creation of this content