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Debt & Bonds

The world of fixed income: G-Secs, T-bills, credit ratings, duration and the risks that debt funds carry.

Government Securities (G-Sec)

The Government of India needs ₹10 lakh crore to build highways and pay salaries. It borrows from the public by issuing G-Secs — formal IOUs with a stated interest rate and maturity date. A 10-year G-Sec at 7.1% means: the government pays 7.1% interest every year and returns your principal after 10 years. Zero chance of default — the Government of India can always print money to repay.

Key takeaway: G-Secs are the safest debt instrument in India — sovereign guarantee, zero credit risk.

Treasury Bills (T-Bills)

The Government needs ₹5,000 crore for just 91 days to manage a temporary cash shortfall before tax receipts arrive. It issues 91-day T-Bills — short-term IOUs at a discount to face value. You pay ₹98 for a ₹100 T-Bill maturing in 91 days, earning ~8% annualised. T-Bills are the foundation of the money market — the safest short-term instrument available.

Key takeaway: T-Bills are short-term Government borrowings (91/182/364 days) — no coupon, issued at a discount to face value.

Commercial Paper

Reliance Retail needs ₹500 crore for 60 days to stock up on inventory before Diwali. Rather than going to a bank and paying 9% interest, it issues Commercial Paper to mutual funds and institutional investors at 7.5%. CPs are short-term IOUs issued only by large, creditworthy companies for working capital needs. Maturity is 7 to 365 days.

Key takeaway: Commercial Paper = short-term corporate borrowing (up to 1 year); higher yield than T-Bills but with some credit risk.

Certificate of Deposit (CD)

HDFC Bank issues a Certificate of Deposit to a mutual fund for ₹100 crore at 7.8% for 6 months. It is like a fixed deposit from the bank's side — the bank borrows from the mutual fund instead of retail depositors. CDs are tradeable in the secondary market (unlike your bank FD), making them more liquid. Only banks and eligible financial institutions can issue CDs.

Key takeaway: CD = a bank's tradeable FD issued to institutional investors — short-term, safe, and slightly better than FD rates.

Debenture

Tata Motors needs ₹2,000 crore for 5 years to build a new EV plant. Instead of taking a bank loan, it issues debentures to the public: a formal written promise to pay 8.5% interest every year and return ₹1,000 per debenture after 5 years. It's like giving Tata a loan with a signed receipt. Corporate debentures pay more than G-Secs but carry credit risk — what if Tata can't repay?

Key takeaway: A debenture is a company's formal loan receipt — higher yield than Government bonds, but carries default risk.

Credit Rating (AAA, AA, BBB)

Before lending money to a company, you want to know: will they repay? CRISIL, ICRA, and CARE are rating agencies that issue school-style report cards for corporate debt. AAA = A+ student, safest borrower. AA = very good. BBB = average. Below investment grade = risky. The IL&FS crisis of 2018 showed how quickly a AAA-rated company can collapse, catching funds off-guard.

Key takeaway: Credit rating is the borrower's repayment reliability score — always check before investing in a debt fund.

YTM (Yield to Maturity)

Sanjay buys a bond for ₹950. It will pay ₹80/year in interest and return ₹1,000 after 3 years. His YTM is ~10.5% per year — the total annual return including the price gain from ₹950 to ₹1,000 plus the interest. YTM is what you actually earn if you hold the bond to maturity. A debt fund's YTM is the best estimate of its future annual return if held long enough.

Key takeaway: YTM is the true annual return from a bond if held to maturity — the key number to compare debt funds.

Modified Duration

Prashant's bond fund has a Modified Duration of 7 years. The RBI unexpectedly raises interest rates by 0.5%. Prashant's fund NAV falls by approximately 7 × 0.5% = 3.5%. Modified Duration tells you exactly how sensitive a bond fund is to interest rate changes. Short Duration funds (MD ~2) barely move when rates change; long Gilt funds (MD ~10) swing sharply.

Key takeaway: Modified Duration = the % fall in bond price for each 1% rise in interest rates — higher duration = more interest rate risk.

Credit Risk

In 2018, IL&FS — a AAA-rated infrastructure company — suddenly defaulted on its debt. Several debt mutual funds had lent it money by buying its bonds. Overnight, those bonds became worthless and NAVs of affected funds fell 20–50%. Credit risk is the risk that the company you lent money to cannot repay. Higher yield = higher credit risk — there is no free lunch.

Key takeaway: Credit risk = risk of borrower default; always prefer AAA-rated instruments in debt funds for capital safety.

Interest Rate Risk

Geeta holds a 10-year bond paying 7%. The RBI raises rates to 8%. New bonds now pay 8% — making Geeta's 7% bond less attractive. To sell it, she must offer it at a discount. This price fall is interest rate risk. It works both ways: when RBI cuts rates, existing bonds rise in price. Long-duration funds amplify this effect; short-duration funds barely feel it.

Key takeaway: When interest rates rise, existing bond prices fall — and vice versa; longer bonds are more sensitive.

Credit Spread

A 10-year G-Sec yields 7.1%. A AAA-rated corporate bond of similar maturity yields 7.7%. The 0.6% extra yield is the credit spread — the market's price for taking the extra risk that a company (unlike the Government) might default. During the COVID-19 crisis, credit spreads widened sharply as investors fled to safer G-Secs, causing corporate bond prices to crash.

Key takeaway: Credit spread = extra yield a company pays over Government bonds — wider spread = higher perceived default risk.

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Educational illustrations only; figures and tax rates are examples and may change. Not investment advice. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.