Saurav Ghosh’s step-by-step guide will help you understand what bonds are, how they help investors make money, how much money they make and which bonds to invest in.
Illustration: Dominic Xavier/Rediff
In a world of market volatility and economic uncertainty, one thing remains constant: the need for steady, predictable income.
For financially conscious Indians — from older millennials and retirees to young professionals — bonds are fast emerging as a reliable tool for creating consistent passive income.
Once considered suitable only for institutional investors and high-net-worth individuals, bonds are now gaining popularity among everyday investors.
Thanks to better access, technology and awareness, more Indians are exploring bonds not just for capital preservation but also for regular monthly cash flows.
What are bonds?
Bonds are promise-to-pay debt instruments. Here, the investor lends money to the borrower in exchange for regular interest payments and capital repayment at maturity.
They are essentially loans you give to companies or to the government.
In return, they promise to pay you interest at regular intervals — monthly, quarterly or annually — and return your invested amount, called the principal, on the agreed date of maturity.
Why bonds are gaining popularity in India
One of the key goals of investment for individuals in their late 30s or older is to create a source of passive income, thereby expanding their income base and reducing their dependency on their primary income source.
Indian equity markets have had a remarkable run since the pandemic but the market volatility of the past few months has served as an eye-opener for investors, especially those who had also invested their emergency funds and short- to medium-term funds such as those required for children’s higher education or a house. This is because withdrawing money invested for essential expenses during a bear market phase (when the markets falls and market returns also fall) means the funds may fall short of the requirement, necessitating, at times, a capital infusion (addition of more funds) from the long-term corpus.
Indians are now realising that equity markets are not an excellent investment source for short and medium-term financial goals. Here is where fixed-income investments, such as bonds, come into play.
Bond investments are a great way to generate regular, predictable cash flow while also preserving capital. They are becoming a go-to for monthly income generation because of the following factors:
Regular income
Bonds pay regular interest. The interest payment frequency is pre-decided and can be monthly, quarterly or yearly.
Low risk and stability
Bonds are generally considered less risky than stocks, especially when issued by creditworthy entities.
Capital preservation
The bond principal repayments are fixed and known in advance. A 5-year bond with a face value of Rs 1,000, a coupon rate (interest rate) of 9 per cent and yearly interest payments will pay out Rs 90 each year as interest and Rs 1,000 (the principal amount) on maturity.
This makes financial planning easy as the cash flows are assured and fixed.
Wide range of options
Bond investments offer a range of options tailored to various risk profiles.
Risk-averse investors can opt for government securities (G-secs) and A-rated bonds (lesser risk of default and hence proportionately lesser return) issued by blue-chip companies.
In contrast, investors with a higher risk appetite can opt for all investment-grade bonds (risk of default relatively more than G-Secs or A-rated bonds and hence proportionately higher return) with a credit rating of BBB- and above.
Rates higher than FDs
FDs have been the conservative Indian investor’s preferred choice for decades. This is slowly changing as the FD rates have come down. Bonds, especially A-rated corporate bonds, offer higher rates than an FD with almost the same risk profile.
Improved access through technology
Online platforms have made bond investing easy and transparent for retail investors. The increased ease of investments is making bonds attractive.
Types of bonds available for retail investors
If you aren’t a bond investor, but are looking to anchor your portfolio by adding bonds to it, here are the common types of bonds you can invest in:
Government bonds or G-secs: Issued by the Reserve Bank of India on behalf of the government, these are the safest investment alternatives available in India as they carry a sovereign guarantee. G-secs are suitable for capital preservation and long-term holding.
State development loans (SDLs): Similar to G-Secs but issued by individual state governments, they carry relatively more risk as compared to G-secs and thus also offer higher interest than G-secs.
Corporate bonds: These are issued by companies to raise funds.
The risk is determined by ratings, where bonds rated AAA to BBB- are considered investment-grade, with AAA being the safest and BBB- being the most risky within this spectrum.
Ratings from BB and below are speculative bonds, offering high interest while also carrying correspondingly higher levels of risk.
Tax-free bonds: Issued by government-backed institutions for developmental purposes, the interest earned on these bonds is tax-free, making them a popular choice among high-income individuals.
Municipal bonds: Issued by urban local bodies (municipal corporations) for developmental projects, the market is still growing in India.
How do bonds help generate passive income?
When you invest in a bond that pays interest monthly or quarterly, that interest becomes your passive income. Let’s understand this with an example:
Suppose you buy Rs 10 lakh worth of a corporate bond offering a 9 per cent annual interest, payable monthly. That’s Rs 90,000 per year, or, Rs 7,500 every month — straight into your bank account.
Furthermore, bond laddering (explained below) — a popular bond investment strategy — can be used to build a bond portfolio that generates a regular monthly cash flow.
Building a bond ladder
To create consistent monthly income, many seasoned investors build a bond ladder — a portfolio of bonds with staggered maturity and interest payout schedules.
Here’s how it works:
- Diversify maturities: Buy bonds maturing in different months or years to ensure liquidity and reinvestment opportunities.
- Spread interest dates: Select bonds with interest payouts in different months to ensure income every month.
Example:
- Bond A: Pays quarterly interest in March, June, September and December.
- Bond B: Pays semi-annually in January and July.
- Bond C: Pays annually in August.
Together, they cover most months of the year — giving you consistent income and reducing reinvestment risk. As each bond matures, you can reinvest in new bonds at current interest rates, ensuring portfolio efficiency over time.
Who should consider bonds for passive income?
A passive source of steady monthly income fosters financial independence, ensuring peace of mind in the event of a weak business cycle, layoffs, or other financial uncertainties. This is the reason why salaried professionals, retirees, freelancers and homemakers should consider including bonds in their portfolios.
Passive income is no longer a luxury — it’s a necessity. As equity markets fluctuate and fixed deposit returns remain modest, bonds are stepping into the limelight as a dependable option for passive income-seeking investors.
Saurav Ghosh is co-founder of Jiraaf, a SEBI-registered online bond platform that enables customers to invest in fixed-income securities like bonds and mutual funds.
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