Investing
Bonds
The stability component of every portfolio. Learn how bonds work, their types, and when to own them.
A bond is a loan you make to a government or corporation. In return, you receive regular interest payments (coupon) and the principal back at maturity. Bonds are the traditional counterweight to equities in a portfolio — they tend to hold value or appreciate when stocks fall, reducing overall portfolio volatility.
How Bonds Work
Understanding the relationship between bond prices and interest rates is fundamental.
- Face value (par): The amount paid at maturity, typically ₹1,000 (India) or $1,000 (US)
- Coupon rate: Annual interest rate as a percentage of face value
- Yield: Actual return based on current price — if price falls, yield rises (inverse relationship)
- Duration: Sensitivity of the bond price to interest rate changes — longer bonds are more sensitive
- When interest rates rise, existing bond prices fall; when rates fall, bond prices rise
Types of Bonds
Different bond types offer different risk-return profiles. Credit quality is the key variable.
- Government bonds: Lowest risk — backed by government; India G-Secs, US Treasuries
- Corporate bonds: Higher yield, higher risk — quality varies by company credit rating
- Municipal bonds (US): Tax-exempt interest — valuable for high-income investors
- Sovereign Gold Bonds (India): Gold-linked return + 2.5% interest, tax-free at maturity
- RBI Floating Rate Savings Bonds: Linked to NSC rate, currently 8.05% (2025)
Bonds in a Portfolio
The traditional 60/40 portfolio (60% stocks, 40% bonds) is a time-tested allocation for moderate-risk investors.
- Young investors (20s-30s): Lower bond allocation (10-20%) — time horizon is long, can ride volatility
- Mid-career (40s-50s): Increasing bond allocation (20-40%) — capital preservation gains importance
- Near/at retirement: Higher allocation (40-60%) — income and stability over growth
- In India, debt mutual funds (which hold bonds) provide easier access than direct bond buying
Key Takeaways
- ✓Bond prices and interest rates move in opposite directions — understand this before buying
- ✓Government bonds are the safest; corporate bonds offer higher yield for more risk
- ✓In India, debt mutual funds and SGBs are often better than direct bonds for retail investors
- ✓Bonds provide stability and income — essential in any portfolio approaching retirement
- ✓Duration risk is the main risk in a rising interest rate environment
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