How to Invest in Bonds in India (Benefits, Drawbacks, Process)

Investing in bonds is a great way to diversify your portfolio and manage risk. Bonds are a form of debt security, issued by companies or government entities, which pay you a fixed interest rate on your investment.

Bonds can be a great investment option for you if you are looking for a steady income and long-term growth.

Let’s discuss what bonds are and how to invest in bonds in India in a step-by-step manner.

What are Bonds in India?

In India, bonds are issued by companies and government entities to raise money for various purposes, such as financing infrastructure projects, expanding business operations, or managing budget deficits.

Bonds are issued for a fixed term, usually ranging from a few years to several decades, and pay a fixed interest rate to investors.

How Does Bond Investment Work?

Bond investments work differently than stock investments. Investing in bonds is like lending money to a company or the government.

When you buy a bond, you are basically loaning money to the issuer of the bond, who promises to pay you back the borrowed amount with interest at a later date.

This interest is called the coupon rate, and it’s usually paid out to the bondholder twice a year until the bond matures.

The bond market in India works through a process called auctions. The government or companies issue bonds, which are then auctioned to the highest bidder. Retail investors can participate in these auctions through their brokers, who bid on their behalf. The winning bidder receives the bond and pays the bid amount to the issuer.

Once you have purchased a bond, it is held in your Demat account, just like stocks. You can sell the bond in the secondary market if you need to liquidate your investment before the maturity date. The price of the bond in the secondary market depends on several factors, such as interest rates, the credit rating of the issuer, and the time remaining until maturity.

Overall, investing in bonds is a good way to earn a fixed income stream while preserving your capital. It is a relatively safe investment option that can provide steady returns over the long term. However, it’s important to understand the risks associated with bond investments and choose the right type of bond based on your investment goals and risk appetite.

The importance of bond rating

The bond rating is an important factor to consider when investing in bonds. Bond rating agencies, such as CRISIL and ICRA, rate bonds based on the issuer’s creditworthiness, financial health, and ability to repay the debt.

The rating agencies assign a score to the bond, which ranges from AAA (highest creditworthiness) to D (default). You should choose bonds with a higher credit rating, as they are less risky and more likely to be repaid.

Types of Bonds Available in India

There are various types of bonds available in India, including government bonds, corporate bonds, tax-free bonds, and infrastructure bonds.

#1. Government Bonds

Government bonds are issued by the central and state governments to fund various projects and programs. They are considered low-risk investments, as they are backed by the government’s guarantee of repayment.

Government bonds are available in various terms, ranging from short-term (less than 1 year) to long-term (up to 40 years).

#2. Corporate Bonds

Corporate bonds are issued by companies to raise money for business operations or expansion. They are considered higher-risk investments, as they are not guaranteed by the government and depend on the company’s ability to repay the debt.

Corporate bonds offer a slightly better interest rates than Governments bonds.

#3. Tax-Free Bonds

Tax-free bonds are issued by government entities to raise money for infrastructure projects, such as highways, airports, and power plants.

They are considered low-risk investments and the interest earned on these bonds is tax-free.

Benefits of Investing in Bonds

Investing in bonds offers various benefits to investors, including:

  • Steady income: Bonds offer a fixed interest rate, which provides investors with a steady income stream.
  • Less Volatility: The value of bonds can fluctuate based on current interest and inflation rates, but they are generally more stable than stocks.
  • Assurance: Bonds also have credit ratings assigned by agencies like CRISIL, providing you assurance while selecting bonds. 
  • Less risky: Bonds are less risky than stocks because, in case of liquidation of a company, bondholders get paid on priority before shareholders. 

Drawbacks of Investing in Bonds

While investing in bonds offers various benefits, there are also some drawbacks to consider, such as:

  • Low returns: Bonds offer lower returns than stocks and other high-risk investments, such as mutual funds and real estate.
  • Larger amount requirement: Some bonds require a larger sum of investment, making them unaffordable for some investors
  • Low liquidity: Bonds come with a lock-in period. If you want to sell the bond before its maturity date, you may not be able to find a buyer, or you may have to sell the bond at a loss.

5 Ways to Invest in Bonds in India

#1. RBI Retail Direct

RBI Retail Direct is a platform launched by the Reserve Bank of India (RBI) in 2020, which allows retail investors to directly invest in government securities. 

rbi retail direct

To invest through RBI Retail Direct, you need to have a Direct Gilt Account with the RBI. The platform offers a simple and hassle-free way to invest in government bonds and eliminates the need for intermediaries such as brokers or agents. 

You have to complete your KYC process which requires a PAN card, bank account details, and a valid mobile number linked with your Aadhar card to open an account. 

#2. Gilt Mutual Funds 

If you’re looking for a convenient way to invest in government bonds, you can consider gilt mutual funds. They are debt mutual funds that solely invest in bonds and fixed-income securities. 

sbi magnum gilt fund

Gilt funds are different from bond funds that may invest in corporate bonds. 

Gilt funds invest entirely in government securities. However, you should check the expense ratio and your investment horizon before investing. 

#3. Bond ETFs

Bond ETFs (Exchange-Traded Funds) are passive investment vehicles that invest in a diversified portfolio of fixed-income securities, such as bonds, and trade on exchanges like stocks. 

Bond ETFs can offer lower costs compared to actively managed bond mutual funds, as they typically have lower management fees and transaction costs. 

Bond ETFs are also more liquid than individual bonds, making it easier for you to buy and sell bonds without a broker.

These ETFs have a defined maturity period that could range from 3 to 10 years.

For example, Gilt5yBees by Nippon India Ltd.

#4. Bond Platforms

Bond platforms allow you to buy government bonds, corporate bonds, and NCDs, in a user-friendly way.

Most platforms allow you to invest from as little as INR 1000. You need to open a trading account and complete the KYC formalities before investing.

Platforms like Golden Pi, and Wintwealth are popular for streamlining bond investment for retail investors.

#5. Sovereign Gold Bonds

Sovereign Gold Bond (SGB) is a government-backed investment option (launched in 2015) that works as a replacement for physical gold. 

SGB belongs to the debt funds category and the main aim of these gold bonds is to encourage people to invest in gold through bonds, which eliminates the need for storing physical gold and minimizes risk. 

SGB comes with a minimum lock-in period of 5 years and the maximum investment period is 8 years. SGB offers a 2% return on investment along with gold price appreciation during the investment period.

The government issues SGB through RBI, and it’s measured in grams of gold, like 1 gram, 10 grams, or 50 grams. 

You invest in cash at the issue price of the bonds and the bonds will be redeemed in cash on maturity. You can check out how to invest in sovereign gold bonds article to learn more about SGBs.

How to Invest in Bonds in India

#1. Opening a Demat Account

The first step to investing in bonds in India is to open a Demat account. A Demat account is a digital account that holds your securities in an electronic format. Securities can be stocks, bonds, mutual funds, and IPOs.

In order to open a Demat account, you will need to provide some basic personal information and documentation, including your PAN card, Aadhar card, and proof of address.

#2. Choosing the Right Bond

Once you have opened a Demat account, the next step is to choose the right bond to invest in. You can invest in a variety of bonds available in India, including government bonds, corporate bonds, and municipal bonds.

The key is to choose a bond that matches your investment goals and risk tolerance.

For example, if you are looking for a low-risk investment with a guaranteed return, you may want to consider investing in government bonds.

On the other hand, if you are willing to take on more risk for the potential of higher returns, you may want to consider investing in corporate bonds.

#3. Placing an Order

Once you have chosen the right bond, the final step is to place an order to buy the bond. You can invest in bonds through your broker, RBi direct portal, or using a bond platform such as Golden Pi.

When placing your order, you will need to specify the number of bonds you wish to purchase. You have to transfer money to the ICCL bank account via RTGS to complete the buying process.

How to Invest in Bonds on Golden Pi 

Golden Pi is an online investment platform that allows investors to invest in bonds and debentures issued by companies, municipalities, and government organizations. The step-by-step process to invest in bonds on Golden Pi is as follows –

Step 1 – Open an account in Golden Pi by clicking on Sign Up.


You can open an account in Golden Pi by providing your PAN number, and Aadhar number and completing KYC verification.

Step 2 – Choose the bond you want to invest in and click on invest.

select bond

Once the account is opened, select the bond you want to invest in.

Golden Pi offers a range of bonds from different issuers with varying interest rates and maturity periods. You can choose the bond you want to invest in based on your investment horizon and risk appetite.

Step 3 – Click on invest.

After selecting the bond you want to invest in, you need to place an order by specifying the amount you want to invest.

Step 4 – Make the payment.

Now transfer the required amount to the counterpart settlement authorities’ (ICCL/ NSCCL) Bank Account via RTGS.

order placed

Step 5 – Receive your bonds

Once your payment is processed, your bonds will be credited to your demat account. You can check out our latest Golden Pi review article to know about the popular bond platform in detail.

Safer Investment Alternatives to Bonds

Investment OptionsKey FeaturesReturnsLock-in periodTaxationRisk
BondsFixed income safer instrumentsVaries between 3% to 10%3 months to 15 years

Tenure < 1 year: STCG at slab rates.

10% LTCG without indexation
Debt Funds

Tenure <1year: STCG at slab rates.

10% LTCG without indexation
Around 6% to 8%No lock-in periodShort-term capital gains tax (STCG) for holding less than 3 years and long-term capital gains tax (LTCG) for holding more than 3 yearsLow
PPF (Public Provident Fund)A government-backed savings schemeCurrently offering an interest rate of 7.1% per annum15 yearsInterest earned is tax-free and contribution qualifies for tax deductions under Section 80C of the Income Tax Act, 1961Low
NPS (National Pension Scheme)A government-sponsored pension schemeAround 10-12%Until retirement age (minimum 60 years)Tax benefits under Section 80C, 80CCD(1B), and 10(10D) of the Income Tax Act, 1961Moderate

Risks Associated with Investing in Bonds

Three primary risks that you need to know before investing in bonds.

  1. Interest rate risk: Bond prices are inversely proportional to interest rates. When interest rates go up, bond prices go down, and vice versa. The longer the maturity of the bond, the more its price fluctuates due to interest rate changes.
  2. Credit risk: Credit risk refers to the possibility of the issuer defaulting on their payments. If the issuer of the bond defaults, you may lose some or all of your investment.
  3. Liquidity risk: Liquidity risk refers to the possibility of not being able to sell the bond when you want to. If the bond is not liquid, it may be challenging to sell it, and you may have to sell it at a lower price than you anticipated.


Investing in bonds in India is an excellent option for you if you are looking for a stable source of income with relatively lower risks.

However, you must keep in mind your investment goal, investment horizon, and bond’s credibility (bond rating can help) before investing your money in bonds.


What is the difference between a bond and a stock?

Bonds are a form of debt where investors lend money to the issuer of the bond, who agrees to pay back the money at a predetermined interest rate.

Stocks, on the other hand, represent ownership in a company. Stockholders are entitled to a portion of the company’s profits in the form of dividends.

Are bond investments safe?

Bond investments are generally considered to be less riskier than stock investments as they are less volatile and offers fixed returns.

What is the average return on investment in bonds in India?

The average return on investment in bonds in India depends on several factors such as the type of bond, maturity, and interest rates.

Generally, bonds offer lower returns than stocks, but they are less volatile.

You can get returns in the range of 5% to 8% on annual basis.


Can retail investors invest in government bonds in India?

Yes, retail investors can invest in government bonds in India.

What is the minimum investment required to buy bonds in India?

The minimum investment required to buy bonds in India depends on the type of bond and the issuer.

Some bonds have a minimum investment of Rs. 1,000, while others require a minimum investment of Rs. 10,000 or more.

How do bond prices fluctuate in India?

Bond prices in India fluctuate due to various factors such as changes in interest rates, inflation, credit ratings, and economic conditions. As interest rates rise, bond prices fall, and vice versa.

What is the tax treatment of bond investments in India?

You have to pay STCG (Short term capital gains) tax if you withdraw the bonds amount within 1 year of investment. You have to pay STCG tax as per the tax slab rates.

If you withdraw bonds amount after 1 year of investment, you have to pay 10% LTCG (Long term capital gains) tax without indexation benefits.

Can NRIs invest in bonds in India?

Yes, NRIs can invest in bonds in India. However, they need to comply with the Foreign Exchange Management Act (FEMA) regulations and open an NRO or NRE account to invest in Indian bonds.


About Rajan Dhawan

Rajan has covered personal finance and investing for over 5 years. Previously, he was in the IT field for 8 years after completing his MCA but his deep interest in personal finance led him to become an investing expert. He is passionate about investing, stocks, startups, and cryptos.

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