Bonds from scratch · Chapter one
A bond is not a fixed deposit
This chapter answers one question: what actually makes a bond different from the fixed deposit you already trust? Not the interest rate, not the paperwork. One specific thing, and once you see it, every other confusion about bonds resolves on its own. You will read a real bond the way you would read a label, see a regulator's own finding on what happens when banks sell one as something it isn't, and look at the actual numbers on why so few Indians have ever bought one.
Published 9 September 2026 · Figures and documents from RBI, SEBI, NSDL and the Ministry of Finance, dated where used
1You already own bonds
Start with three things that are almost certainly true of you.
If you have a job with an EPF account, 85 percent of that money is invested in debt. Not shares. Loans, mostly to the Government of India.
If you hold a life insurance policy, you are part owner of the single biggest pile of government bonds in the country. Indian insurance companies hold 25.59 percent of every central government bond in existence, as of March 2026.
And if you have a fixed deposit, your bank is legally required to park 18 percent of its deposits in government securities. Some of your FD is lent to the government whether you asked for that or not.
So you are already a bondholder. You have just never picked one yourself, never seen what it was worth on a Tuesday, and never had the interest land in your own account.
That is the strange thing about bonds in India. They sit underneath almost every rupee of retail savings, and almost nobody who owns them has ever met one directly.
2What a bond actually is
Here is a real bond, exactly as it was listed on 8 September 2026.
| Field | What it says |
|---|---|
| Issuer | REC Limited (a government-owned infrastructure financier) |
| ISIN | INE020B08EP3 |
| Coupon | 7.77% a year |
| Maturity | 30 September 2026 |
| Rating | CRISIL AAA |
| Interest paid | once a year |
Read that like a label, because that is what it is. REC Limited borrowed money from whoever bought this bond. It promised to pay 7.77 rupees a year for every 100 rupees it borrowed, and to return the full amount on 30 September 2026. That is the whole contract.
Every bond in the world reduces to those four facts, whichever government or company issued it:
| The four facts | What it means |
|---|---|
| Who is borrowing | Whose promise this is |
| Face value | What you get back at the end, per unit |
| Coupon | The interest, as a percent of face value, per year |
| Maturity | The date you get your money back |
You have been on the other side of this arrangement your whole life. When you want money for a house, you go to a bank. The bank gives it to you. You promise to pay interest every month and return the full amount by an agreed date. That is a loan, and you understand it completely.
A bond is that same arrangement with the chairs swapped. You are the bank. Here is the flip, explained plainly:
“Whenever you and I need money, we go to the bank to avail a loan. Against this loan, we promise to pay the bank periodic interest and also return the money after a certain amount of time... Likewise, the Government of India also needs money to build roads, bridges, dams, hospitals, etc. Essentially, you are lending a part of the overall loan the government is seeking.”
Zerodha Varsity, Government Securities chapter, 2018
That last phrase is the important one. You are lending a part. The government does not want ten thousand rupees from you specifically, it wants lakhs of crores from everybody. So it chops the loan into small identical pieces and sells them. You buy a piece.
Everything else in this module, including all the hard parts, is one long answer to a single question. What is that promise actually worth?
3The part that is not a fixed deposit
Read the four facts again and a bond sounds exactly like an FD. Fixed interest, fixed date, your money back at the end. Most people stop right there, and it is where nearly every bond mistake in India begins.
Here is that exact belief, asked in public, in the comments under Zerodha Varsity's government securities chapter:
“If T-Bill opted say for 91 days, can participant sell/close prior maturity date ? As like Fixed Deposit can be break any point of time (except FD with tax saving scheme)”
Devendra Mhatre, Varsity comment, 21 April 2025
You can sell early. But not the way you break an FD. Nobody hands your money back at a fixed penalty. You have to find a buyer, and the buyer decides the price.
A fixed deposit is a private arrangement between you and your bank. A bond is a thing you own, and you can sell it to somebody else.
That one difference is the whole story. Because a bond can be sold, it has a price. Because it has a price, that price moves. And because it moves, you can leave early with more than you put in, or less.
| Fixed deposit | Bond | |
|---|---|---|
| Can you leave early? | Yes, with a penalty | Yes, by selling to someone else |
| What do you get if you leave early? | Your money, minus the penalty | Whatever a buyer will pay. Could be more or less. |
| Does its value change day to day? | No | Yes |
| Who owes you the money? | Your bank | Whoever issued it |
| If you hold to the end? | Interest plus your money back | Interest plus your money back |
Look at that last row. Held to the end, they behave the same. That is exactly why the confusion is so easy and so expensive. The two things only differ in the middle, and the middle is where people actually sell.
Australia's financial regulator states the resolution in two sentences worth reading slowly:
“If you hold the bond until maturity, you get back the face value (or principal) of the bond. If you sell a bond before maturity, you'll get the market value. This could be lower than the face value.”
ASIC MoneySmart, updated 14 July 2026
Two prices. One is fixed and arrives on the last day. The other exists every day in between and is decided by strangers. An FD only has the first. A bond has both.
4Why the price moves when nothing has happened
This is the idea people find hardest, so here it is with no bonds in it at all.
Suppose you put ₹1,00,000 into a fixed deposit paying 6 percent for five years. The next morning, your bank starts offering 8 percent to new customers.
Do you now get 8 percent? No. Yours is locked at 6.
Now imagine you could sell your deposit to a friend. Would he pay you the full ₹1,00,000 for a 6 percent deposit, when he could walk into the same branch and open an 8 percent one himself?
Of course not. He would only take yours if you knocked something off the price.
That is a bond price falling. Nothing happened to your deposit. Something happened around it.
Run it the other way. If rates dropped to 4 percent, your 6 percent deposit is suddenly the best thing on the shelf, and your friend would pay you more than ₹1,00,000 for it.
That is the entire mechanism. When interest rates rise, existing bonds are worth less. When rates fall, they are worth more. The coupon never changes. Only what people will pay for it.
This confusion showed up on a trading forum, put into words exactly:
“I had assumed as long as there is no Interest Rate movement announced by RBI there should be stability in GOI Bond/GILT prices, at least no drastic falls…”
smakkar, TradingQnA, 28 August 2020
He was watching for an RBI announcement. But the market prices what it expects, every minute of every day. By the time RBI speaks, the move has usually already happened.
And a year later, another reader stated the same contradiction without meaning to:
“We had a deal of 10%. Now whether the T-Bill increase or decrease, why does it affects our deal?”
Varun Agrawal, Varsity comment, 8 January 2022
It does not affect the deal. He will get his 10 percent if he holds on. It affects what the deal is worth if he wants out early, and those are two different questions that sound like one.
5When the promise breaks
A bond is a promise. Promises are only as good as whoever made them, and that is the part that gets left out of the sales pitch.
In March 2020, Yes Bank's Additional Tier 1 bonds were written off completely. Not reduced. Written to zero. Many of the people holding them were not professional investors.
One son described what happened to his 65-year-old father:
“The relationship manager asked my father to break his fixed deposit and put the money in these bonds as they were yielding a higher return.”
Saurabh, on his father Harish's experience, Mint, 8 March 2020
Another investor, 86, was told this:
“I was assured the bond was secured and I would get payment every year and my principal back after four years.”
Vas Dev Seth, Mint, 8 March 2020
SEBI investigated how these bonds were sold and fined the bank ₹25 crore. This is the finding, straight from page 54 of the order itself.
Figure 1
This is the regulator's own finding, not a paraphrase: investors were sold a bond by being shown its interest rate next to a fixed deposit's, with nothing said about what made the two different. They thought they were switching to a better FD. They were not. They were buying the riskiest debt a bank can issue, the kind specifically built to be wiped out first if the bank runs into trouble.
So before the maths of any bond, ask two questions.
Who is promising? The Government of India, which can print the rupees it owes you, is not the same as a small finance company. Between those two sits everything else, on a long spectrum.
Where do you stand in the queue? If a company runs out of money, its obligations are paid in a fixed order. Lenders before owners. Secured lenders before unsecured ones. Some bonds, like the Yes Bank ones above, sit so far down that queue they are barely lenders at all.
Most people have this backwards, and assume a shareholder in a failing company gets paid before a bondholder does. It is the other way round, and that ordering is the main reason to own a bond instead of a share in the same company.
6Why bother at all
You have an FD and it works. Here is the honest case for looking further, without the sales pitch.
Your fixed deposit has been quietly losing money.
Take the numbers as they stood in September 2026. SBI paid 6.25 percent on a one year deposit. If you are in the 30 percent tax bracket, tax takes about 31.2 percent of that, leaving you 4.30 percent. Inflation in July 2026 was 4.45 percent.
Your money bought slightly less at the end of the year than at the start. A real return of about minus 0.15 percent.
That is not a bad year, either. Using RBI's own deposit rate and inflation series, a 30 percent bracket saver lost purchasing power on bank deposits in every one of the five years from 2019-20 to 2023-24. The worst, 2022-23, destroyed 3.19 percent of it.
Here is the sharpest way to see it. At 4.45 percent inflation and 31.2 percent tax, you need a deposit paying 6.47 percent just to stand still. No large Indian bank offered that on a one year retail deposit in September 2026.
And a detail worth knowing about yourself: at the 20 percent tax slab, the same FD gives you a small positive real return. At 30 percent it does not. The line between making and losing money on a fixed deposit runs straight through the middle of the tax brackets.
So what does a bond offer instead? In September 2026, a ten year government bond yielded about 6.96 percent against SBI's five year deposit at 6.05 percent. Nearly a full percentage point more, from a borrower that cannot run out of rupees.
But do not let anyone tell you bonds always win. At the short end they do not. In September 2026, a one to three year government bond yielded less than the same bank's fixed deposit. Which is better depends on how long you are lending and who you are lending to, and any answer that skips those two questions is selling you something.
The whole dilemma showed up in one sentence on Reddit, the week this chapter was written:
“I am a safe investor like I don't risk much… i am not sure how bonds works but i see good returns. Should I try out bonds? Or go with FD?”
u/Foreign-Finger-8585, r/personalfinanceindia, 2 September 2026
That is the honest starting point for most people, and the rest of this chapter is about getting him an answer.
7Why almost nobody owns one
Given all that, you would expect bonds to be everywhere. They are not, and the numbers are startling.
India has about 4.67 crore active demat accounts at NSDL alone. Of those, only 6,08,666 hold any debt instrument at all, as of 31 August 2026. That is 1.30 percent. Ninety-nine out of a hundred accounts that could legally hold a bond do not hold one.
For government bonds specifically, RBI built a portal called Retail Direct in November 2021, so that ordinary people could buy directly, with no broker and no minimum beyond ₹10,000. Here is what that portal has to show for nearly five years, straight from RBI's own published statistics.
Figure 2
RBI's own footnote to this table adds a third number, not shown here: 1,17,245 further applications were withdrawn or rejected before completion.
Put all three numbers together and you get the real story. 7,90,391 people started an application. 3,84,362 finished.
Just under half of everyone who ever tried to open an account to lend money to their own government gave up partway through.
That is not disinterest. That is a door that does not open easily.
There are three reasons this market was never built for you.
It was built for institutions. Look at who owns Indian government bonds: banks around a third, insurers just over a quarter, the RBI close to a fifth. In RBI's official ownership tables there is no line for individuals at all. Households are folded into an "others" bucket that also holds state governments, PSUs, trusts and foreign central banks.
The tickets were enormous. Until recently, a corporate bond was sold in pieces of ₹10 lakh. SEBI cut that to ₹1 lakh in October 2022, and to ₹10,000 in July 2024. If you have never bought a bond, one honest reason is that five years ago you probably could not have afforded one.
And most bonds are never offered to you. Of all the corporate bond money raised in India in the last financial year, 98.8 percent was placed privately with institutions. Barely one rupee in a hundred came through a public issue an ordinary person could actually join.
8What comes next
You now have the whole idea. A bond is a loan you can sell. It has two prices, one fixed at the end and one moving in between. It is a promise from somebody specific, and who that somebody is matters more than the interest rate printed on it.
Everything from here is detail on those three sentences.
The next chapters cover what a bond is actually paying you once you read past its name, what makes a price move and by how much, how ratings work and what they leave out, what happens inside a default, and how to actually buy one.
One last thing. Somewhere in India, somebody is being asked the same question that opened this chapter: choosing between a fixed deposit they understand and a bond nobody has explained to them.
By the end of this module, that will be a question you can answer for yourself.
Key takeaways
- You already own bonds through your provident fund, your insurance policy and your bank's own reserves. You have just never chosen one yourself.
- A bond is a loan where you are the lender. Four facts describe it completely: who is borrowing, the face value, the coupon, and the maturity date.
- The one real difference from a fixed deposit is that a bond can be sold. That single fact gives it a second price, one that moves every day the first one never does.
- Held to maturity, a bond and an FD behave identically. They only differ in the middle, which is exactly where people sell.
- When interest rates rise, existing bonds are worth less. When rates fall, they are worth more. The coupon itself never changes.
- A bond is not safe. It is a promise from somebody you choose, and where you sit in the repayment queue matters as much as the rate on offer.
- A 30 percent bracket saver has been losing purchasing power on bank deposits for years. In September 2026 you needed about 6.47 percent just to stand still.
- Bonds do not reliably rise when shares fall. They do move far less, and that is the honest reason to hold some.
- Only 1.30 percent of NSDL demat accounts hold any debt. Just under half of everyone who ever started a Retail Direct application gave up before finishing it.