Why Bonds Should Be Part of Your Portfolio

It is essential to point out that continuing to invest in profit-making assets despite the economic risks involved is essential. For that, you need an investment plan. For most of us, the goal is to invest smartly and retire early.

 

Investing in the bond market should be the obvious choice. It is the safest investment if you want to protect your wealth or earn a decent return without taking too much risk. There are two ways to profit through the bond market. One is to hold the bond till its maturity and profit from the interest earned. The other is through the secondary market, where existing bonds are bought and sold at a discount or a premium to their original value. You make money in capital gains.   

The risk in the bond market is primarily of two types. These include credit risk and market risk. When you buy government bonds, there is zero risk. You can never lose money in government bonds if you hold them to maturity. The government guarantees the interest on these bonds. The performance in the secondary market does not impact the coupon rate promised. As a result, bonds provide a predictable income stream. For example, if you invest in government securities, you are sure to receive fixed coupon payments twice a year, despite price changes. A coupon payment is fixed on the face value of the bond. For instance, if you invest in a bond worth 1,000 rupees with a coupon rate of 7%, you will get 70 rupees per year. This amount is usually paid every six months, so you get two payments of 35 rupees each.

What Are Bonds and How Do They Work?

A bond is a type of investment where you lend money to a company, government, or institution for a fixed period. In return, they promise to pay you interest (known as a coupon) regularly and return your original money (principal) when the bond matures.

Think of it like giving a loan to a trusted borrower who agrees to pay you a fixed income on time. Bonds are a great way to earn fixed returns without taking high risks like stocks.

There are different types of bonds you can invest in:

• Government Bonds: Issued by the Central or State Government, considered very safe.

• Corporate Bonds: Issued by companies to raise funds. They offer higher returns but may carry slightly more risk.

• Tax-Free Bonds: Interest earned is exempt from taxes.

• Sovereign Gold Bonds (SGBs): Linked to gold prices and issued by the government.

• Municipal Bonds: Issued by local bodies for infrastructure needs.

Each type plays a role in smart bond investing depending on your goals, income needs, and risk profile.

Key Reasons to Include Bonds in Your Portfolio

Wondering “Should I have bonds in my portfolio?” Here’s why the answer is yes—bonds play a crucial role in building a balanced investment strategy.

• Stability and Predictable Returns

Bonds are considered more stable than stocks. With fixed interest payments and a known maturity date, they offer a predictable income. You know exactly how much you will earn and when, making them reliable for financial planning. This is a core reason why bonds in portfolio planning are so valuable.

• Diversification and Risk Reduction

Adding bonds in your portfolio helps reduce overall risk. When the stock market is down, bond investments often stay steady or even rise. This balance protects your wealth during uncertain times and highlights the role of bonds in portfolio diversification.

• Income Generation

Bonds offer regular interest payouts—monthly, quarterly, or half-yearly. This income stream is especially useful for retirees or investors who want cash flow without selling their assets. A good bond investment strategy focuses on selecting bonds that meet your income needs.

• Capital Preservation

If you hold good quality bonds (like government securities) till maturity, your principal is safe. That means you get your original investment back, making bonds a strong tool for preserving capital.

• Tax Efficiency

Some bonds, such as tax-free bonds or Sovereign Gold Bonds, offer tax benefits. If held till maturity, capital gains in SGBs are exempt from tax. These features make bonds a smart option for tax-conscious investors and support an efficient bond investment strategy.

When to worry about the risk

The element of risk appears only when you trade in the secondary bond market. Your best weapon to deal with that risk is to understand the yield curve. Interest rates generally trend down in a high-growth economy. However, high

For example, the bond price will decrease when the interest rate increases. At the same time, the reinvested yield of coupons for the bond will increase, and vice versa. Therefore, an effective strategy requires that these two opposite effects cancel each other out, guaranteeing that the asset's future value will not be affected by the fluctuations in the market.

 

Moreover, bonds should appeal to those who trade in the Indian market. There is great potential in India's debt market, which is valued at around $2.1 trillion. India's bond market even trumps its stock market.  About $1.6 trillion is made up of government bonds, with a good chunk composed of issuances by various Indian states (State Development Loans or SDLs) and other agencies.

Whether your goal as an investor is to make more money without increasing your initial investment or to protect your investment from any potential market risks, having a diversified portfolio is crucial. Balancing your portfolio with a good mix can protect your investment in the long run. Using smart bond investing strategies like the immunization strategy can add the necessary edge.  

Bonds are helpful for those with surplus funds looking to generate a regular income. You can create a 'tap of money' flowing into their account every six months. Many high-net-worth individuals and companies with surplus cash rely on that plan. The idea is to never run out of cash. At the same time, it ensures wealth protection.

Common Myths About Bond Investing

Bond investing is often misunderstood. Let’s clear up some common myths:

1. “Bonds are only for old people.”

While retirees do prefer bonds for fixed income, bonds are useful for any age group. They help add stability and regular returns to a well-balanced investment portfolio, especially during market volatility.

2. “Bonds are completely risk-free.”

Government bonds are very safe, but corporate bonds carry some credit risk. Understanding the issuer’s credit rating helps manage that risk and make informed decisions.

3. “Bonds don’t give good returns.”

Bonds may not offer double-digit growth like equities, but they offer stable and predictable income, especially when held till maturity. Over time, they help build wealth conservatively.

4. “All bonds are the same.”

Not true. There are government bonds, corporate bonds, tax-free bonds, Sovereign Gold Bonds, and more. Each serves a different purpose in your portfolio based on your financial goals.

Smart Bond Investing Tips

Want to make the most of your bond investments? Follow these simple and effective tips to maximise returns and reduce risk:

1. Set Clear Goals

Know why you’re investing—whether it’s for steady income, capital safety, or portfolio diversification. Defining your objective helps you choose the right bond product.

2. Understand the Bond Type

Choose government bonds for safety, corporate bonds for higher returns, or Sovereign Gold Bonds (SGBs) for added tax benefits. Each serves a unique financial purpose.

3. Check Credit Ratings

Look for bonds rated AAA, AA, or A for safer investments. These ratings indicate lower credit risk and a higher chance of getting your money back on time.

4. Mind the Interest Rates

Bond prices go down when interest rates rise. So, time your buying decisions accordingly, especially during fluctuating rate cycles.

5. Diversify Smartly

Don’t put all your money in one bond. Mix different bond types, issuers, and tenures for a balanced and resilient bond portfolio.

6. Hold Till Maturity

Holding bonds till maturity ensures full principal repayment and shields you from market price volatility.

7. Use a Reliable Platform

Choose Bondbazaar, a SEBI-regulated platform, for safe, secure, and transparent investing.

8. Consult an Expert

Speak with a relationship manager (RM) or use curated bond baskets to simplify and personalise your investment decisions.

How to Start Investing in Bonds (Step-by-Step Guide)

Here’s a simple guide for smart bond investing in India:

1. Understand the Basics of Bonds

Know that a bond is a loan you give to the government or a company, and in return, you earn interest. Bonds play an important role in a portfolio by offering predictable income and lower volatility than stocks.

2. Choose the Type of Bonds

Pick between government bonds, corporate bonds, tax-free bonds, or SGBs, depending on your risk appetite and goals. Selecting the right type is a key step in building your bond investment strategy.

3. Decide Your Investment Goals

Are you looking for regular income, capital protection, or tax savings? Your financial goal will guide your bond choice and define the purpose of including bonds in your portfolio.

4. Assess Credit Risk and Interest Rate Sensitivity

Government bonds are low-risk. For corporate bonds, always check the credit rating. Also, understand how bond prices move with interest rates to adjust your bond investment strategy accordingly.

5. Where to Buy Bonds in India

Use Bondbazaar, a SEBI-regulated company offering a wide range of bonds with real-time access to the bond market. You can buy and sell bonds easily, just like stocks.

6. Diversify Your Bond Portfolio

Spread your investment across different types of bonds and issuers to reduce risk. Diversification strengthens the overall stability of bonds in your portfolio.

7. Monitor and Rebalance

Keep track of interest rate changes and credit ratings. Rebalance your portfolio if needed to stay aligned with your goals.

8. Consider a Curated Bond Portfolio

New to bonds? Bondbazaar offers curated bond baskets tailored to specific goals like tax-free income, safety, or higher returns—making your entry easier and smarter.

Conclusion

Bonds are a smart way to build a balanced and reliable investment portfolio. Whether you’re a conservative investor or aiming to balance a high-risk portfolio, bonds offer a smart, strategic edge. The role of bonds in a portfolio is crucial—they reduce volatility while ensuring steady returns. At Bondbazaar, we make your bond investment journey seamless with expert support, curated portfolios, and easy digital access. 

Start small, stay informed, and let your bond portfolio grow with confidence and clarity, one wise decision at a time.

Frequently Asked Questions

Why should I include bonds in my investment portfolio?

Bonds offer stable returns, lower risk, and predictable income—making them ideal for balancing your portfolio. They help protect your capital during market downturns and generate regular payouts. Whether your goal is income, safety, or diversification, bonds play an important role in building long-term financial strength.

Are bonds a good investment for beginners?

Yes, bonds are suitable for beginners because they are easy to understand and less volatile than stocks. They offer fixed interest payments and lower risk, especially when held till maturity. Bondbazaar also provides expert support and curated options, making it easier to start investing in bonds with confidence.

What role do bonds play in a diversified portfolio?

Bonds help reduce overall risk by balancing equity exposure. When stock markets are volatile, bonds offer steady income and act as a cushion against losses. Their low correlation with other asset classes makes them ideal for building a diversified portfolio that performs well across market cycles.

How much of my portfolio should be invested in bonds?

It depends on your age, risk appetite, and financial goals. A common rule is to invest your age as a percentage in bonds. For example, if you're 40, consider keeping 40% in bonds. Financial experts also suggest having at least 20% to 40% in bonds for stability and steady income.

What are the risks of investing in bonds?

Though safer than stocks, bonds do carry some risks—like credit risk (issuer defaults), interest rate risk (rising rates lower bond prices), and liquidity risk (difficulty in selling). Government bonds are usually safer, while corporate bonds may offer higher returns with slightly more risk. Holding till maturity helps reduce most risks.

Do bonds offer tax benefits in India?

 

Yes, certain bonds offer tax benefits. For example, Sovereign Gold Bonds (SGBs) provide tax-free capital gains if held till maturity. Bonds held in retirement accounts may also provide tax advantages. Always check the bond type and tax treatment before investing.