What is the Bond Market?

Last Updated on October 16, 2023 by BFSLTeam BFSLTeam

Most investors are familiar with the stock market. However, there’s another segment of the financial market that holds some beneficial types of assets for all kinds of investors. This is the bond market. While the equity segment of the financial markets focuses on offering potentially inflation-beating returns, the bond market in India is a more conservative space that is defined by lower levels of risk and more stable returns.

If you are yet to venture into the bond market in India and include these debt securities in your portfolio, you may need to do some research before you begin. This article gives you a strong introduction to the meaning of the bond market, how it works and the types of bonds it includes. 

What is the Bond Market? 

The bond market is a segment of the debt market. It is also known as the fixed-income market or the credit market. Debt instruments called bonds are traded and available for investors in this market segment. Bonds are essentially securities that various entities may issue to raise funds for different purposes. 

For instance, the government may require funds to repay its debts, launch projects for infrastructural development and take care of various capital expenditures. Publicly traded corporations and other companies may require capital to fund their business expansion requirements and other operations. Bonds help these entities fulfil their capital requirements easily. 

The funds that are invested when people purchase bonds are treated like loans to the issuing entities. In return, investors earn interest via coupon payments on the par value or face value of the bonds issued. This sums up the fundamental details about the meaning of the bond market.

Also Read: What is a Bond ETF?

How Does the Bond Market Work? 

Now that you know what this market segment is, let’s take a closer look at how the bond market works in India. Like the stock market, the bond market can also be divided into two segments, namely the primary market and the secondary market. Here’s what they each entail. 

Primary Bond Market

In the primary bond market, issuing entities like governments, public sector undertakings (PSUs) and other companies issue new bonds. The transaction occurs directly between the issuing entity and the investors. This is similar to the IPO market in the stock market segment. 

Secondary Bond Market

In the secondary bond market, these securities are freely bought and sold between investors themselves. The entities that issued the bonds do not directly participate in this market segment. Trades between investors occur either on the exchanges like the NSE and the BSE or via the over-the-counter (OTC) market. 

Additional Read: Sovereign Gold Bond

Types of Bond Markets

Now that you have caught up on the meaning of the bond market and how it works, let’s delve into the different types of bond markets based on the categories of bonds traded therein. This will give you a clear picture of the assets that make up the bond market.

Government Bond Market

The government bond market is where the bonds issued by the central and state governments are issued, bought and sold. These bonds are backed by the government, making them extremely safe in terms of risk levels. However, the coupon rates on government bonds may be lower than the returns offered by other riskier securities like corporate bonds. 

Municipal Bond Market

Like the government, local municipal corporations may also issue bonds to raise funds for various infrastructure projects. These instruments are traded in the municipal bond market. Typically, these securities offer the advantage of tax-free interest payments to investors, making them attractive investment options.

Corporate Bond Market

If you want to earn higher returns on your bonds in exchange for slightly elevated risk levels, the corporate bond market is the right place for you. Here, the bonds issued by companies are traded freely. To compensate for the increased risk, most corporate bonds offer higher rates of interest than government bonds. 

Depending on the financial status of the issuing company and the general stability of the sector it operates in, the bonds it issues can carry different credit ratings. In case you are planning to invest in the corporate bond market in India, make sure you check the ratings and understand the creditworthiness of the company before you proceed.

Emerging Bond Market

This term refers to the bond market in emerging economies. They include different types of debt securities, including government, corporate and municipal bonds. These economies may offer lucrative investment options in the bond market segment for interested investors. 

How to Invest in the Bond Market in India? 

In case you want to invest in government bonds, you can do this in any of the following ways: 

• Through the RBI Retail Direct platform 
• Through the NDS-OM secondary market 
• Through your stockbroker’s trading platform

However, if you want to invest in corporate bonds, you can choose to buy them during a new issue or in the secondary market. 

Should You Invest in the Bond Market in India?

The bond market in India may be worth considering in various scenarios. Typically, you could benefit from investing in bonds if: 

• You are Risk-Averse

If you are a conservative investor, the bond market gives you many investment options that carry low or negligible risk. 

• You Need a Source of Income

If you are looking for a source of guaranteed income to either add to or replace your primary income, bonds can be suitable options. 

• You Want to Reduce Your Portfolio Risk

Bonds also help bring down the overall risk in your portfolio. This can be particularly useful if your investments are currently equity-heavy. 

• You Want to Diversify Your Portfolio

You can also use bonds to diversify your portfolio across different asset classes and market sectors without amplifying the risk too much. 

Conclusion

The bond market is a small part of the larger debt market in India. Various other debt securities such as debentures, certificates of deposit and bills of exchange also make up the debt market in the country. In addition to this, there are also debt funds that predominantly invest in bonds and other debt securities.