For decades, fixed deposits (FDs) with banks have been the financial comfort zone for Indian households. With features like guaranteed returns, safety and simplicity, they were the go-to choice for risk-averse savers. However, in today’s high-inflation environment, FDs are losing their sheen. Inflation based on the Consumer Price Index hit a 14-month high of 6.21 percent in October, eroding the real value of FD returns. Add to this the volatility in the equity market and it becomes clear why exploring alternatives like government bonds is essential for a diversified portfolio.
Government bonds—a form of debt issued by central or state governments—offer stability and predictability. With sovereign backing, these bonds ensure safety while providing a range of options to suit diverse financial goals. India’s bond market reflects this potential, growing from Rs 68 lakh crore in 2014 to Rs 217 lakh crore in 2024. By 2028, it is expected to touch $5 trillion (approximately Rs 415 lakh crore), becoming the second-largest globally.
Why government bonds are gaining in popularity
Investors often turn to bonds during market turmoil, and recent geopolitical and economic uncertainties have amplified this trend. In FY24, foreign portfolio investors injected Rs 1,21,059 crore into India’s debt market, marking the highest inflows in nearly a decade. For domestic investors too, government bonds have emerged as a safe haven, combining stability with decent returns.
Here’s a breakdown of the key government bond options available today.
Treasury bills (T-bills)
These are short-term securities maturing in 91, 182 or 364 days. Ideal for investors seeking liquidity, T-bills currently yield between 6.4 percent and 6.6 percent. While they don’t offer market-linked returns, they guarantee full face value at maturity.
Dated government securities (G-Secs)
Long-term bonds with tenures ranging from 5 to 40 years, G-Secs pay semi-annual interest with yields typically between 6.7 percent and 7.2 percent. They’re the cornerstone in the portfolios of conservative investors seeking a steady income.
Floating rate savings bonds (FRSBs)
With a seven-year tenure and semi-annual rate resets, FRSBs offer a current rate of 8.05 percent. This makes them attractive to investors looking for inflation protection and rising-rate adaptability.
State development loans (SDLs)
Bonds issued by state governments, SDLs offer slightly higher yields (7.5–8.0 percent) than G-Secs, reflecting the marginally higher risk attached to them.
Factors to consider while investing in bonds
Investing in bonds requires understanding key factors to align them with your financial goals.
Credit ratings
Ratings from agencies like CRISIL, ICRA and CARE measure a bond’s creditworthiness. Higher-rated bonds (AAA is the highest) provide safety but lower returns, while lower-rated options may offer higher yields at greater risk.
Liquidity
Instruments like G-Secs are highly liquid, making them easy to trade. In contrast, SDLs and corporate bonds may face liquidity constraints, especially in volatile markets.
Interest rate sensitivity
Bond prices move inversely to interest rates. This means long-term bonds carry higher risk for those looking to sell before maturity.
Also read | Yearender 2024: Of mules & phishing in the dark web — how scamsters played us
Tax implications
While tax-free bonds provide interest without any levy, most bonds’ returns are taxable. Assessing post-tax returns is vital for maximising investment efficiency.
Yield metrics
Current yield: Annual interest divided by the bond’s market price, indicating return relative to its purchase price.
Yield to maturity (YTM): The total return an investor can expect if the bond is held for the full term, including interest and any capital gains or losses.
India’s growth and bond investments
Government bonds are not just secure investments, they are also integral to India’s economic growth. With the fiscal deficit at 5.6 percent of GDP in FY24, the government relies on bond issuances to fund public expenditure, infrastructure projects and green initiatives under the National Infrastructure Pipeline. Bonds also promote sustainable financing, helping the country meet developmental goals while ensuring wealth preservation for investors.
A market outlook rooted in optimism
India’s bond market is on an upward trajectory, underpinned by reforms and the Reserve Bank of India’s initiatives like the Retail Direct Scheme. By allowing retail investors to buy bonds directly, the scheme simplifies access and eliminates intermediaries, democratising this asset class.
In today’s unpredictable financial climate, government bonds offer far more than safe returns. They act as a financial anchor, providing stability, liquidity and diversification. Whether you’re looking to hedge against market volatility or build a conservative portfolio, government bonds tick all the right boxes. With their growing role in India’s economic framework, now is the perfect time to explore this compelling investment opportunity.
The author is co-founder and CEO, FYERS.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
