Bonds and debentures are debt investment instruments with a Fixed Rate of Return and Fixed Maturity Period. While Bonds are securities that are mostly issued by the government, debentures are always issued by corporations.

Bonds and Debentures are issued by these entities to raise money from investors as loans used to fulfill business objectives like entering new markets, starting a new project, or scaling existing businesses. For every bond/debenture issue, fixed interest payments (Coupons) are made regularly on pre-specified dates. The principal loan amount(face value per unit of Bond/ Debenture) is paid back on the pre-specified maturity date.

Bonds can be an attractive investment option for investors seeking stable income and portfolio diversification.

Here are a few potential benefits:

• Most bonds offer fixed coupon payouts at regular intervals.
• Depending on the issuer and credit rating, certain bonds may offer higher yields compared to traditional savings instruments like Fixed Deposits.
• Bonds can help balance your portfolio by adding relatively stable income-generating instruments.
• Bonds are available across different credit ratings, from AAA-rated (relatively safer) to lower-rated high-yield bonds, allowing investors to choose based on their risk appetite

Both bonds and fixed deposits (FDs) are considered relatively safer investment options, but they differ in terms of returns, liquidity, and tax treatment.

Here are a few points to consider:

• Certain bonds may offer higher coupon rates than traditional FDs, depending on the issuer, credit rating, and tenure.
• Many listed bonds can be traded in the secondary market, giving you an opportunity to exit before maturity.
• While interest on most bonds is taxable (like FDs), certain notified bonds such as Section 54EC Capital Gains Bonds and tax-free PSU bonds may offer specific tax benefits under prevailing income tax laws.

Considering the Risk Pyramid, Bonds fall into the category of low-risk securities just like Fixed Deposits. There are a couple of risks involved.

• Default risk: The loss that an investor faces when issuer defaults(fail to return principal amount or Interest payments or both)


• Liquidity risk: This loss comes into picture only when an investor wants to sell bonds before maturity. This loss is incurred by the investor when he/she finds no buyer for their bonds and hence sells them at a discount.


• Interest-rate Risk: If interest rates increase, the price of the Bond decreases. At this time, the investor wants to sell the bonds he/she has to sell at a discount price. However, the flip side is that, if the interest rates in the economy decrease, bonds’ selling price will increase. At such a time, an investor can make capital gains by selling his bonds at a premium to his buy price.

Corporate bonds typically offer interest payouts, tradability on exchanges, and accessibility through regulated platforms. They also fall under different tax treatments depending on tenure and investor profile. Risk levels vary by issuer rating.