Types of Bonds in India
A prudent and wise investor makes well-informed investment decisions when investing in bonds, it is
important to understand the terminology and types of bonds
the market. To familiarize yourself with
bond related key terms, refer to our comprehensive FAQs
Bond investors include government entities, pension funds, mutual funds, public & private corporates,
banks and individual investors. This pie is now undergoing a structural shift where individual investors
are rapidly growing as a large segment as they move away from the traditional choices of Fixed
Read: Here’s why your parents
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Bond Type by Issuer
Bonds are issued by various entities and they are usually referred to by the type of their issuing
Government Securities (G-Sec): These are bonds issued by the Government of India to finance
national developmental activities and form the largest segment of outstanding bonds in India. They
are deemed to be the safest and referred to as “risk-free”.
State Development Loans (SDLs): Bonds issued by the State Government are called SDLs and are
issued by different states in India for their developmental needs. They have an implied guarantee
from the central government but pay higher interest than G-Secs. Different SDLs have different
ratings for each state given their respective credit strength.
State Guaranteed Bonds: These are bonds guaranteed by a state for a particular developmental
activity such as establishing infrastructure for electricity, roads, highways, towns, agriculture,
etc. These are individually credit rated based on the financial strength of the state as well as
that of the standalone state operating company.
Public Sector Bonds (PSUs): These are bonds issued by national companies where majority
ownership is held by the Government of India. These companies are involved in growth activities in
the sector of power, agriculture, housing, infrastructure, education etc. Each PSU has a separate
credit rating based on its financial strength. However, it’s important to note that they do not have
any explicit guarantee from the government.
Corporate Bonds: These bonds are issued by private companies and are also referred to as
Non-Cumulative Debentures or NCDs. People sometimes mix up meaning of bonds and
fundamentally they are the same thing! In India, bonds issued by private companies have been called
NCDs implying they are not equity or have ability to ‘cumulate’ interest coupons that may be missed.
These bonds are issued by banks in India whether private or owned by the
Government of India. Banks issue bonds to raise capital for lending and are the most regulated
issuers. Depending on their balance sheet their bonds can be senior or subordinated with the latter
having sub-categories such as Tier 3, Tier 2 or Tier 1 (which are perpetual).
NBFC Bonds: In most countries globally, the largest bond issuance sector (after government)
are the financial institutions. Non-Banking Financial Companies’ (NBFCs) bonds are the same as
corporate bonds but are just named independently given the total large issuance by this particular
Bond Type by Structure
Investors have a wide variety of bonds in India to choose from based on their structure. Some broad
Fixed Coupon Rate Bonds (Plain Vanilla): These are the most basic category of bonds having a
fixed coupon payment at predetermined fixed intervals for instance quarterly, monthly, half-yearly,
etc. with a defined maturity date.
Floating Coupon Rate Bonds: This coupon rate is linked to a benchmark rate (like interbank or
SBI lending rate) and varies with the changes in benchmark rate at the time of coupon payment. These
are a good investment in a rising interest rate economy as the investor is hedged versus higher
future interest rates.
Zero-Coupon Bonds (ZCBs): These bonds are issued at a price much lower than the face value.
They do not pay any interest coupon at all (hence the name ZCBs) and are redeemed at face value
straight at maturity date. The difference between the discounted issue price and the redemption
amount represents the return to the investor.
Callable and Puttable Bonds: Such bonds give the option to either the issuer (callable) or
investor (puttable), to redeem or get back investment before the maturity date. These dates are
referred to as Call Date and Put Date respectively.
Subordinated Bonds: These are usually issued by banks and NBFCs and rank junior to their
regular “senior” bonds. Essentially in bankruptcy, their recovery claim is lower, and given this
risk, coupon/yield on these are higher than senior bonds by the same issuer.
These instruments pay fixed coupon rates to investors but do not have a maturity date. Instead, they
have predetermined Call Dates on which the issuer can decide to redeem the bonds. They are usually
Bonds: PSU companies such as IRFC, NHAI, REC, HUDCO, NABARD, etc. issue these
bonds. The interest earned on these bonds are tax-free in the hands of the investor. These were
introduced by the government to attract investors and raise vast amounts of capital for
Covered Bonds: These are structured debt instruments. A pool of assets is set aside to
back the bond and, in addition, specific collateral is assigned to the bond. This gives dual
recourse to the investors as the credit risk lies on quality of the pool as well as the financial
strength of the issuer.
Principal Protected Market Linked Debentures: Certain floating rate debentures carry coupons
linked to a benchmark like Sensex, price of Gold etc. A market-linked debenture does not pay any
coupon before maturity.
Capital Gain Bonds: Capital Gain bonds or
54EC Bonds are bonds referred to under sec
the Income Tax Act, and are issued by NHAI, REC and PFC. This is a good choice for investors who
would incur long-term capital gains from the sale of a property. These bonds can help you avail of
tax exemptions up to Rs. 50 lakhs per year.
the biggest advantage of investing in bonds
in India is that they provide predictable income streams
with less volatility. In the past few years, the domestic bond market has not only increased in size but
also in traded volume. Individual investors are a large chunk of this growth, and the mission of
IndiaBonds is to
provide easy online access - both in terms of a platform for investment and a
repository of bond knowledge! Time to EXPLORE bond
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