How to invest in bonds in India: what the extra yield pays for

An FD and a corporate bond both promise a fixed rate for a fixed term, so they get compared as if they were the same thing. They differ in who stands behind the promise. DICGC's guide to deposit insurance lists savings, fixed, current and recurring deposits as covered, and lists stocks and bonds, and deposits mobilised by NBFCs, as not covered. Its FAQ puts the cover at Rs 5,00,000 per depositor per bank, principal and interest together.

A bond has no such backstop. SEBI's FAQ on the corporate bond market says that when an issuer defaults, you may lose all or a substantial part of your investment, and that even for listed bonds there is no certainty a liquid secondary market will develop. An FD can usually be broken early for a penalty; a bond can only be sold to someone who wants it, at a price that person sets. The gap between the two rates is the issuer paying you to accept that.

Take Rs 1,00,000 for three years: an FD at an illustrative 7 percent, and a bond at an illustrative 9.5 percent, bought at face value at issue and held to maturity. Both pay interest yearly and both are taxed at a 30 percent slab before cess. No fees, no early sale, every payment on time.

Before tax the bond earns Rs 7,500 more. Tax takes Rs 2,250 of that, leaving Rs 5,250, or Rs 1,750 a year: an after-tax yield of 6.65 percent against the FD's 4.9 percent. The 2.5-point spread on the screen is 1.75 points in your hand, and the bond's whole three-year advantage is 5.25 percent of what you put in. Anything that costs more than that, a late payment, a forced sale at a low price, a partial loss, makes the FD the better choice in hindsight.

Now split Rs 5,00,000 equally across five issuers at the same illustrative 9.5 percent for three years. Four pay in full. The fifth pays its first coupon, then defaults, and holders recover an illustrative 25 percent of face value at the end of year three. Real recoveries vary widely and can take far longer.

The four good bonds return Rs 4,00,000 of principal and Rs 79,800 of coupons after tax. The fifth paid Rs 6,650 and returns Rs 25,000, so Rs 75,000 is gone. The portfolio ends at Rs 5,11,450, a three-year gain of Rs 11,450, or 2.29 percent. Without the default it would have gained Rs 99,750; FDs at 7 percent would have earned Rs 73,500 after tax. One default in five leaves you Rs 62,050 behind the FDs.

That default costs Rs 88,300: Rs 75,000 of principal plus Rs 13,300 of coupons that never came, or 88.3 percent of the bond's face value. The portfolio's extra income over FDs is 5.25 percent of the total, so no single bond can exceed 5.95 percent of the portfolio if one default is to leave you level. That is 17 equal issuers.

SEBI's corporate bond FAQ draws the line. The coupon is the interest the bond pays on its face value. Yield is your return from the date you buy, at the price you pay. At allotment, when price equals face value, the two match; afterwards the price moves with demand and interest rates, and yield moves the opposite way. Yield to maturity is the return from buying at today's price and holding to maturity; current yield is the annual coupon divided by the price.

Take a bond with a face value of Rs 10,000, a 9.5 percent yearly coupon and three years left. It pays Rs 950 a year whatever you paid, Rs 2,850 in all, plus Rs 10,000 at maturity: Rs 12,850. Buy it at Rs 10,250 and the current yield is 9.27 percent but the yield to maturity is 8.52 percent, because you paid a Rs 250 premium you will not get back; profit before tax is Rs 2,600. Buy it at Rs 9,800, a Rs 200 discount, and the current yield is 9.69 percent, the yield to maturity 10.31 percent, the profit Rs 3,050.

Between coupon dates the buyer also pays the seller the interest accrued since the last coupon; SEBI's FAQ calls the price with it the dirty price. Compare offers on yield, not on price.

Holding to maturity removes price risk only if the issuer pays. Selling early adds another question: what will a buyer pay on the day you need cash? Say you hold ten of the Rs 10,000 bonds above, Rs 1,00,000 at face value, bought at issue at 9.5 percent. A year later you need the money, with two years to run.

If yields on similar bonds have risen 1 point to 10.5 percent, a buyer pays about Rs 9,828 a bond, Rs 98,276 for ten, Rs 1,724 below cost. If the bond rarely trades and the only buyer wants another 0.5 point, the price is Rs 9,743, or Rs 97,431 for ten, Rs 2,569 below. With Rs 6,650 of after-tax coupons from the first year, you net Rs 4,081 before any tax relief on the loss; the FD would have paid Rs 4,900. If yields instead fall to 8.5 percent, ten bonds fetch Rs 1,01,771, a gain of Rs 1,771. The point is not that early sale loses; it is that the outcome is unknown when you buy.

Every listed bond carries a rating from one or more credit rating agencies. SEBI's FAQ puts it simply: a higher rating suggests lower risk and lower yields; a lower rating, higher risk and higher returns. The scale runs from AAA down through AA, A and BBB, with plus and minus steps, and anything below the BBB grade is generally treated as speculative. The letters are the agency's opinion of how likely timely payment is, not a promise.

Use the rating as a price check. In the example above the bond yields 2.5 points more than the FD. If a default costs 75 percent of face value, that spread covers an annual default rate of about 3.33 percent before tax, or 2.33 percent after tax at a 30 percent slab. A bond whose rating suggests defaults are rarer than that pays you for the risk; one whose issuer looks shakier does not, however high the yield.

Look past the letters. A secured bond with a claim on assets ranks ahead of an unsecured one; SEBI's FAQ notes secured debt must carry full security cover or more, watched by a debenture trustee acting for holders. A negative outlook or a rating on watch means a change is being considered.

Most retail buyers reach corporate bonds online in India through an online bond platform provider, or OBPP. SEBI's August 2026 circular on the framework records that it was prescribed by a notification in November 2022 under Regulation 51A of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. It lists what an OBPP may offer: listed debt securities, including municipal and securitised debt; debt to be listed through a public offering; listed government securities, state development loans and treasury bills; listed sovereign gold bonds; and now Section 54EC bonds. Products regulated by RBI, IRDAI, IFSCA or PFRDA may be offered on a separate tab or another website, under that regulator's rules. SEBI's website links to the lists of OBPPs registered with NSE and BSE; check a platform there first.

The ticket size has changed too. SEBI's circular of 3 July 2024 kept Rs 1,00,000 as the general face value for privately placed debt, but allowed Rs 10,000 if the issuer appoints a merchant banker and the bond pays interest at regular intervals with a fixed maturity and no structured obligations. A December 2025 circular extended this to zero coupon bonds. Not every bond qualifies.

If you buy through Grip, SEBI's register of stock brokers lists Grip Broking Private Limited as registered on NSE, valid from June 2023. Check the entity on your contract note against that register.

The risky part of buying a bond is rarely the bond. It is putting in money that turns out to be needed before maturity, or stacking a bond on FDs and funds you have lost track of. Unyfy works this out from the transaction emails your bank and card send you and, on Android, transactional SMS, with no bank password, no UPI PIN and no manual entry.

Two parts fit this decision. The investments view, free, lists the FDs, mutual fund SIPs, stocks and dividends it sees in your transactions, so you can see what you already hold, and with which bank, before adding credit risk. The fixed expenses screen, on Pro, predicts what the coming month is already committed to, the EMIs, premiums and bills on a cycle, so the money you lock away for three years is money nothing else is waiting for.

Bonds are bought in the app through Grip, and each purchase is a payment you authorise. Check the rating, the issue document and the spread arithmetic above before you buy; nothing in the app is investment advice. Install Unyfy on Android, or use the web app at app.unyfy.co.in on an iPhone.