Most Indian investors treat "debt" as a fixed deposit and stop there. Bonds are worth understanding because they are the other half of almost every sensible asset allocation — and because the reason "safe" debt funds sometimes post losses is genuinely counter-intuitive.
What a bond is
You lend a neighbour ₹1,000 for ten years. He agrees to pay you ₹70 every year and return the ₹1,000 at the end. That agreement is now an asset — and if you needed cash in year three, you could sell the right to those remaining payments to somebody else.
That is a bond. The ₹70 is the coupon, fixed for life. The ₹1,000 is the face value, returned at maturity. And the price someone else will pay you for it depends entirely on what other borrowers are paying at that moment.
The two risks
| Risk | What it is | How to control it |
|---|---|---|
| Interest rate risk | The price falls when yields rise. Measured by duration — roughly the percentage price fall per 1% rise in yields. | Hold shorter-maturity bonds, or hold to maturity so price movements never crystallise. |
| Credit risk | The borrower fails to pay. A government bond has effectively none; a low-rated corporate bond has plenty. | Check the credit rating and read the rationale. Never buy yield without understanding whose promise you are accepting. |
What you can actually buy in India
- Government securities (G-Secs) — sovereign, effectively no credit risk. Buyable directly through RBI Retail Direct, free, in small amounts. Treasury bills are the short-dated version.
- State development loans — issued by state governments, marginally higher yield than central G-Secs.
- Corporate bonds — higher yield, real credit risk. Listed ones trade on the exchanges, though liquidity is often thin.
- Debt mutual funds — the practical route for most people. Gilt funds hold only government paper; corporate bond funds take credit risk; liquid funds hold very short maturities and behave almost like cash.
- Sovereign Gold Bonds and similar schemes — periodically available, and covered in the next lesson.
Yield to maturity, and why the coupon is not your return
- If price < face value
- YTM is above the coupon — you also gain as the price pulls to par
- If price > face value
- YTM is below the coupon — you lose the premium as it pulls to par
Example: A bond paying an 8% coupon bought at ₹1,100 does not return 8%. You will receive ₹1,000 at maturity, so the ₹100 premium is a loss spread across the holding period. YTM accounts for that; the coupon does not.
Fixed income basics
2 questions. Answers are revealed once you submit all of them.
1.The RBI raises rates sharply. What happens to a long-duration gilt fund you already own?
2.A corporate bond fund yields 3 percentage points more than a gilt fund. Why?
Padosi ko ₹1 lakh diya, tay hua har mahine ₹800 byaaj aur 3 saal baad mool wapas. Uska business chal jaaye ya dabba band ho — aapko utna hi milega. Bond yahi hai. Share mein aap partner ban-te ho, bond mein sirf lenewale se lenedaar — kam risk, kam maza.
- A bond’s coupon is fixed, so its price must move inversely to market rates.
- Duration measures rate sensitivity; longer maturity means bigger price swings.
- Credit risk and rate risk are separate — G-Secs have only the second.
- Extra yield in fixed income is always payment for extra risk.
- RBI Retail Direct lets individuals buy government securities directly, for free.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- yield to maturity meaning in bonds
- Yield to maturity is the single annual return you would earn by buying a bond at today’s price and holding it to maturity, collecting every coupon and the face value at the end. It differs from the coupon whenever the price is not exactly face value — buy at a discount and the YTM sits above the coupon, buy at a premium and it sits below, because the price pulls back to par as maturity approaches. YTM is therefore the number that lets you compare two bonds; the coupon on its own tells you very little.
- the maximum tenure of a treasury bill issued in india is
- 364 days. The Government of India issues treasury bills in three tenures — 91-day, 182-day and 364-day — and they are zero-coupon instruments sold at a discount to face value, so your return is the difference between the two rather than an interest payment. Central government paper issued with an original maturity beyond one year is a dated security, or G-Sec, not a T-bill.
- minimum amount to buy a g-sec on rbi retail direct
- ₹10,000 of face value, and in multiples of ₹10,000, through the non-competitive bidding route on RBI Retail Direct. Opening the account and bidding are free — there is no brokerage or commission — which is what turned government securities from an institutional product into something an individual can hold directly. Holdings there can also be sold in the secondary market segment the platform gives you access to.
- why did my debt fund lose money when interest rates went up
- Because bond prices move opposite to interest rates, and a fund’s NAV is simply the market value of the bonds it holds. The coupons on those existing bonds were fixed at issue, so once newly issued bonds start paying more, the old ones only find buyers at a lower price. Credit quality has nothing to do with it: a gilt fund holding only government paper, where every rupee will certainly be repaid, can still post a loss through a rate-hiking cycle.
- what does duration mean in a debt fund
- Duration measures how sensitive a bond or bond fund is to interest rates — roughly the percentage by which its price falls for each one percentage point rise in yields. A fund with a duration of six would lose in the region of 6% if yields rose by 1%, and gain about as much if they fell. It is why a long-duration gilt fund and a liquid fund can lend to exactly the same borrower and still behave nothing alike.