Beyond the yield: Five things to consider before buying a bond
For most of the last decade, a bond in India was something investors heard about but rarely owned. The minimum ticket sat at ₹10 lakh, then ₹1 lakh; numbers that quietly told the average retail investor that this market was not built for them. That has changed, with SEBI lowering the minimum face value of privately placed debt securities to ₹10,000, and online bond platforms now putting hundreds of issuances a click away. For the first time, a schoolteacher in Indore and a fund manager in Mumbai have access to the same bond.
However, access is not the same as understanding. When the yield is the first and often the only number an investor sees, it is easy to treat a bond like a fixed deposit with a better rate. In reality, a bond is a loan which investors are making to a specific borrower, on specific terms and for a specific amount of time.
Maturity: when investors get their money back
Every bond has a date on which the borrower promises to return the principal amount. That date matters for two reasons. First, it should match the investor’s goal, since the money they need in three years does not belong in a ten-year bond. Second, maturity drives price sensitivity. Longer-dated bonds swing more when interest rates move: a rate cut lifts their price, a rate hike drags it down. Held to maturity, those price swings are noise.
Coupon: the income which the investors were promised
The coupon is the interest paid by the bond, which is often twice a year. It is usually fixed at issue and acts as a stream in a portfolio full of moving parts. However, the coupon is not the same as the yield. The yield accounts for the price which an investor actually pays by buying a bond below its face value and the yield runs higher.
Credit quality: how likely the investors are to be repaid
This is the number that separates a bond from a bank deposit. A deposit is backed by insurance up to a limit; a corporate bond is backed only by the issuer's ability to pay. Credit ratings ranging from AAA down to below investment grade are agencies' opinions on that ability. They are useful, but they are opinions, not guarantees, and they can change. The rule worth internalizing is that yield is the market's price for risk. When a bond offers three or four percentage points more than a government security of the same tenure, that gap is not a gift, it is compensation for a risk someone has decided is real. A higher yield is a question, not an answer.
Liquidity: exiting before maturity
In theory, investors can sell a bond on any day the market is open. However in practice, India's secondary bond market is thin, with only a small fraction of outstanding bonds changing hands on a given day, and the most active trading clusters in the highest-rated names. For a lower-rated or less-known issuer, investors may find few buyers, or buyers who will take it off their hands only at a discount. This is why seasoned bond investors buy with the intention of holding to maturity, and treat the ability to exit early as a bonus rather than a plan.
The issuer: the borrower behind the bond
Every bond acts as a promise, made from the party making it. This is the part investors skip and regret. Behind the rating and the yield is a real entity: a government, a public-sector company, a bank, an NBFC or a manufacturer, with its own balance sheet, cash flows and repayment record. A government security carries the sovereign's backing. A corporate bond carries a company's fortunes. Before investors lend, they should read what the issuer does, how it makes money, how much it already owes, and whether it has paid its bondholders on time before.
None of this is meant to make the ordinary investor shy away from bonds. India's corporate bond market has grown to nearly ₹59 lakh crore, and for a generation of investors looking beyond equities and fixed deposits, it is one of the most useful tools available. But the reform that opened the door: a ₹10,000 ticket has only done half the job. The other half is ours to do; to look past the headline yield and actually read the five things that determine whether a bond does what the investors had hoped.
Democratizing access to bonds was the easy part but democratizing the understanding of them is the work that matters. When an investor knows what he is buying: the maturity, the coupon, the credit, the liquidity and the issuer behind it all, a bond stops being a rate on a screen and becomes what it always was: a considered loan, made on the investor’s terms.
