Bonds, explained simply
Lend your money, earn regular interest, get it back on a set date.
A bond is a loan that you give to the government or to a company. They pay you interest at fixed intervals, and on a set date, called maturity, they return your original money.
Picture a formal IOU. The borrower writes down how much they borrowed, the interest they will pay, and the date they will repay. A bond is that IOU, made official and regulated.
Types of bonds
Each type does a different job. Here is what the names mean.
Government Securities
Issued by the central and state governments. They carry the lowest risk of non-payment because the government stands behind them.
Public Sector Bonds
Issued by government-owned companies to fund projects such as power, roads and railways.
Corporate Bonds & NCDs
Issued by companies. They usually pay more interest than government bonds and carry more risk, so the credit rating matters.
Sovereign Gold Bonds
Government bonds whose value follows the price of gold and that also pay 2.5% interest a year. Existing bonds are bought and sold on stock exchanges.
How it works
- 1
Pick a bond
Compare who is issuing it, its credit rating, the interest it pays and when it matures.
- 2
Get set up
Complete KYC. Most bonds are held electronically, so a demat account is usually needed.
- 3
Buy the bond
Apply when a new bond is issued, or buy an existing one from the market.
- 4
Earn interest
The issuer pays interest into your bank account on fixed dates.
- 5
Get your money back
At maturity the face value is returned to you. You can also sell earlier at the market price.
A 5-year bond
Meena buys a bond with a face value of ₹1,00,000 that pays 8% interest a year for 5 years. Every year she receives ₹8,000 as interest. At the end of 5 years, the issuer returns her ₹1,00,000.
Illustration only. It assumes the bond is held to maturity and the issuer pays on time. Tax is not considered.
Who is it good for?
- People who want regular, predictable income
- Careful investors who want to balance their share-market investments
- Money that can stay invested for several years
- Those who like knowing the exact date their money comes back
Things to keep in mind
- Credit risk: the issuer may delay or fail to pay interest or principal
- Interest rate risk: if market rates rise, the price of your bond falls, which matters if you sell before maturity
- Liquidity risk: some bonds are hard to sell quickly at a fair price
- Ratings are opinions of rating agencies and can change
- Interest earned is taxable
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Disclaimer: Bonds, corporate fixed deposits, and other debt instruments are subject to issuer credit risk, interest rate fluctuations, and liquidity risk. Ratings represent the opinion of the rating agency and do not guarantee future performance. Read the information memorandum and offering documents carefully before investing. The information on this page is for general education only and is not investment, tax or insurance advice.