India’s debt market has come a long way, with a staggering ₹22 lakh crore (~$268 billion) traded in FY09, dominated by government bonds (G-secs) making up 96% of the total trading activity.

Fast forward to FY20, and the market has seen ₹1.49 crore crore worth of trading activity, with G-secs constituting 89%. This shift from a mere 4% corporate bonds to 11% (Almost 3x) over 11 years highlights growing trust in the Indian corporate sector. But how does India compare to global markets like the USA, China, and Europe? Quiet behind, but we are getting there.

But is this it? As an investor, do you only have these 2 options to look into when it comes to the debt markets? Well, it has more depth than what you have just read. Both Corporations and GOI issue different kinds of debt products (Yes, there are more debt products than bonds), and they usually do it as per their own requirements and needs.

But as an investor, how do you know which is better for you as per YOUR Appetite?

1. Plain Vanilla Bond/Straight Bond/Bullet Bond:

These bonds offer fixed coupon payments and return the principal at maturity. They are straightforward, making them ideal for conservative investors.

• Example: In March 2024, the RBI issued a 10-year G-Sec with a coupon rate of 7.10%, which was well-received by investors seeking a secure investment in a volatile market.

• Fun Fact: G-Secs are ideal for risk-averse investors looking for stable returns, especially during times of economic uncertainty. They also offer a great opportunity to lock in a fixed income for long-term financial planning, such as funding your retirement.
  

2. Municipal Bonds:

Also called, Muni, Municipal bonds in India are issued by urban local bodies (ULBs) and municipal corporations to fund infrastructure projects. Although still developing, the municipal bond market in India has been growing, driven by government incentives and reforms.

• Example: The Ahmedabad Municipal Corporation was the first Municipal Corporation In South-East Asia to raise money through public Issuance, when it had raised INR 100 Cr through this route in 1998.

• Fun Fact: Municipal bonds often come with tax benefits, making them a great option for investors in higher tax brackets. Plus, by investing in these bonds, you contribute directly to the development of your city's infrastructure.

3. Floating Rate Bond (FRB):

FRBs have coupons linked to a benchmark interest rate, like the 182-day treasury bill, adjusting with market rates. This makes them a safer option in fluctuating interest rate environments.

• Example: Floating rate bond recently issued by the RBI. The bond was announced in June 2020 and was available for investment from July 1st, 2020. The bond’s coupon rate was pegged to the interest rate of the National Savings Certificate (variable component) with a spread of 35 basis points (fixed component) higher than it. 

• Fun Fact: FRBs are considered a conservative investment because they reduce the risk associated with rising interest rates.

4. Zero-Coupon Bonds:

These bonds are issued at a discount and mature at face value without periodic interest payments, making them ideal for long-term investors.

• Example: The National Highways Authority of India (NHAI) issued zero-coupon bonds in January 2024, maturing in 20 years, priced at ₹30 for a face value of ₹100.

• Fun Fact: Zero-coupon bonds are excellent for long-term goals like funding a child’s education or retirement.

5. Inflation-Indexed Bonds (IIBs):

IIBs protect your investment from inflation by adjusting the principal amount to inflation rates, with interest paid on the adjusted principal.

• Example: The RBI reintroduced CPI-linked IIBs, offering a real return of 2.5% over inflation.

• Fun Fact: These bonds are a reliable hedge against inflation, ensuring your investment grows in real terms.

6. Green Bonds:

Used to fund environmentally friendly projects, green bonds are part of the growing trend towards sustainable finance.

• Example: In February 2024, SBI issued a $500 million green bond to finance renewable energy projects, which was oversubscribed due to high demand.

• Fun Fact: Green bonds allow you to contribute to a sustainable future while earning competitive returns.

7. Inverse Floater Bonds:

These bonds have a coupon that moves inversely with the benchmark rate, providing a unique investment opportunity.

• Example: DEF Corp issued an inverse floater bond, where the coupon decreased as interest rates increased, benefiting from falling rates.

• Fun Fact: Inverse floaters are mainly used by NBFCs and are popular among mutual fund houses.

8. Step-Up/Step-Down Bonds:

These bonds are designed to pay lower coupon in the initial years of the bond and higher coupon towards maturity. These bonds are preferred by issuers like startups who expect their cash flows to balloon after some time and hence would like to service the bonds with lower cashflows at the beginning. Investors take higher risks as they expect the majority of their cashflows toward end, increasing their exposure for a longer time and vice versa with Step down bonds

• Fun Fact: Step up bonds are quite risky and would need to be evaluated in such a way. However, step down bonds can be explored for a balanced portfolio.

9. Deferred Coupon Bonds:

These bonds delay interest payments until maturity or a specified period, making them suitable for investors preferring lump-sum payments later.

• Example: JKL Infrastructure issued deferred coupon bonds, aligning payments with expected project cash flows.

• Fun Fact: Deferred coupon bonds are often used by infrastructure companies expecting project cash flows years later.

10. Deep Discount Bonds:

Issued at a substantial discount to face value, these bonds cater to long-term investors seeking capital appreciation.

• Example: The National Highways Authority of India (NHAI) frequently issues deep discount bonds, appealing to investors with their potential for long-term growth.

• Fun Fact: Deep discount bonds are popular among those looking to lock in future returns at a lower initial investment.
  
  The list doesn't end here. We also have Securitized debt, Sovereign Gold Bonds, Perpetual Bonds,AT1 Bonds, Tier-2 Bonds, Savings Bonds, Tax-free bonds, Asset-Linked Bonds (Asset-Backed Securities), Equity Linked Bonds, Participatory Bonds, Income Bonds, Payment in Kind Bonds, Extendable bonds and Extendable reset Bonds. And best of them, Bonds with call and Put options (Embedded Options), which we cover in the next blog.

India’s bond market offers a wide array of instruments catering to various investment strategies and risk appetites. From the security of G-Secs to the environmental focus of green bonds, investors have numerous options to diversify their portfolios. By staying informed about the different types of bonds and their market dynamics, you can make more strategic decisions that align with your financial goals.