Bonds vs Stocks: Risk, Returns and Where You Can Start
Buy a bond and you become a lender. Buy a stock and you become a part owner. A bond is a loan you make to a government or company that pays fixed interest and returns your principal on a set maturity date, while a stock is a share of ownership with no promised payout and no maturity.
That one difference explains why bonds are steadier, why stocks have historically delivered more over long stretches, and why most sensible portfolios hold both.
What follows: how each pays you, what can go wrong, the tax treatment in India, a worked example splitting Rs 5 lakh, and where a retail investor can actually buy bonds.
The ownership versus lending divide
A company that issues a bond has a legal obligation. Interest must be paid on schedule and principal returned at maturity, or it is in default. Bondholders also rank ahead of shareholders if a business is wound up.
A company that issues shares promises nothing. Dividends are optional. If the business does well your share of profits grows without limit. If it fails, equity holders are last in the queue.
Bonds and stocks side by side
| Feature | Bonds | Stocks |
|---|---|---|
| Your position | Lender or creditor | Part owner |
| Income | Fixed coupon, usually half yearly | Dividend if declared, never promised |
| Maturity | Fixed date when principal returns | None, you exit only by selling |
| Claim on assets | Ahead of equity holders | Last in line |
| Main risks | Default, interest rate moves, low liquidity | Business risk, valuation, price swings |
| Voting rights | None | Yes, on equity shares |
| Price driver | Moves inversely to interest rates | Moves with earnings and sentiment |
| Tax on gains | Interest at your slab rate | 12.5% long term above Rs 1.25 lakh, 20% short term |
How do bonds and stocks actually pay you?
A bond pays two ways: the coupon, a fixed percentage of face value, and any capital gain or loss if you sell before maturity.
The second channel surprises people. Bond prices fall when market interest rates rise, because a new bond paying more makes your older one less attractive. The longer the maturity, the sharper the swing.
A stock pays through dividends and price appreciation, which depends on earnings growing over years. No formula promises it.
The interest rate seesaw, in numbers
Say you hold a 10 year bond of Rs 1,000 face value with a 7% coupon, paying Rs 70 a year. If yields on similar bonds rise to 8%, nobody pays Rs 1,000 for Rs 70 of income when Rs 80 is available elsewhere. The price falls until the yield matches, roughly into the high Rs 930s.
Hold to maturity and you still get Rs 1,000 back. Sell in year three and you book that loss. “Bonds are safe” is only true when your holding period matches the bond’s maturity.
Worked example: Rs 5 lakh split two ways
Assume Rs 5 lakh held for five years, split as Rs 2 lakh in bonds and Rs 3 lakh in equity.
The bond leg. Rs 2,00,000 at 7.5% pays Rs 15,000 a year, so Rs 75,000 of interest over five years plus Rs 2,00,000 principal back, giving Rs 2,75,000 before tax. In the 30% slab, tax on that interest is Rs 22,500, leaving about Rs 2,52,500.
The equity leg. Rs 3,00,000 compounding at 11%: 3,00,000 x 1.11 = Rs 3,33,000 after one year, and 3,00,000 x 1.11^5 = Rs 5,05,500 after five, a gain of Rs 2,05,500. Held over 12 months, long term capital gains tax is 12.5% after the Rs 1.25 lakh exemption: (2,05,500 minus 1,25,000) x 12.5% = Rs 10,062, leaving about Rs 4,95,438.
Combined: roughly Rs 7.48 lakh from Rs 5 lakh. Notice the tax asymmetry: the bond leg earned less and was taxed harder, at slab rate rather than 12.5%.
Now the caveat. That 11% is an assumption, not an entitlement. In a bad five year stretch the equity leg could finish below Rs 3 lakh, while the bond leg would still have paid its Rs 75,000.
Where can an Indian retail investor buy bonds?
Five routes, with very different liquidity.
- Government securities. Through RBI Retail Direct and some brokers, in small denominations, with sovereign credit quality.
- Treasury bills. Tenors of 91, 182 and 364 days, useful for parking money with a known end date.
- Listed corporate bonds and NCDs. Traded on NSE and BSE through your demat account. Higher yields, real credit risk, thin volumes.
- Public NCD issues. Companies open subscription windows periodically, similar in mechanics to an IPO.
- Debt mutual funds. The simplest route for most people, since a manager handles credit checks and maturity laddering. A liquid fund suits short horizons; longer duration funds carry more rate risk.
One tax point matters. Debt fund units bought on or after 1 April 2023 are specified mutual funds under Section 50AA, so gains are taxed at your slab rate however long you hold, with no indexation. Neither direct bonds nor debt funds get the 12.5% equity treatment.
For equities the entry point is a demat and trading account, covered in our primer on what the stock market is. Trades settle on T+1 by default, with an optional same day T+0 cycle rolling out in phases for larger stocks, where orders must be placed before 1:30 PM.
How should you split between the two?
- Fix your time horizon first. Money needed within three years has no business sitting in equity.
- Build a few months of expenses in a liquid or overnight option before adding either asset.
- Decide an equity share you could hold through a 30% drawdown. That number is your real risk tolerance.
- Match bond maturities to when you need the money, so a rate move never forces a loss making sale.
- Rebalance yearly. If a rally takes your mix from 60:40 to 75:25, trim deliberately rather than by mood.
If you would rather not pick individual securities, funds do the same job. Our guide to diversifying a mutual fund portfolio covers mixing equity and debt schemes without overlap.
Risk note: bonds are not risk free. Issuers default, ratings get cut, and thin bonds are hard to exit fairly. Equity can fall sharply and stay down for years.
Frequently Asked Questions
Are bonds better than fixed deposits for an Indian investor?
Government securities offer longer tenors and are freely tradable, while FDs offer bank convenience and deposit insurance up to a limit. Corporate bonds usually pay more than FDs of similar tenor as compensation for credit risk, and interest from both is taxed at slab rate. See our comparison of mutual funds and fixed deposits.
What happens to my bond if the issuing company goes bankrupt?
You become a creditor in the insolvency process and rank ahead of shareholders, but recovery is neither quick nor complete. Secured bondholders are paid from pledged assets while unsecured holders share what remains. Recovery rates vary widely, which is why issuer quality matters more than an extra percent of yield.
Can I lose money in a bond if I hold it to maturity?
Only if the issuer defaults or restructures. Price falls caused by rising rates reverse as the bond approaches maturity, since you are repaid face value. High inflation can still erode the real value of a fixed coupon even when every payment arrives, so purchasing power risk exists without any default.
How much money do I need to start buying bonds in India?
Small amounts work. Government securities on RBI Retail Direct come in modest denominations, and listed bonds often trade around Rs 1,000 face value, though liquidity in a given issue can be thin. Debt mutual funds start lower still, with SIPs from as little as Rs 100 to Rs 500 at many fund houses.
Which is better for a five year goal, bonds or stocks?
For a fixed date obligation like a down payment, bonds or debt funds maturing near that date are more predictable. Equity suits horizons of seven years or more, where time smooths drawdowns. Many investors use a glide path: more equity early, shifting into debt as the goal approaches.
Key Takeaways
- A bond makes you a creditor with a fixed coupon and maturity date; a stock makes you an owner with upside and no promises.
- Bond prices fall when rates rise: a 7% coupon 10 year bond drops from Rs 1,000 into the high Rs 930s if market yields move to 8%.
- Bond interest and post April 2023 debt fund gains are taxed at slab rate, while long term listed equity gains are taxed at 12.5% with Rs 1.25 lakh exempt yearly.
- Match bond maturity to when you need the cash. That habit turns interest rate risk into a non issue.
- Retail routes to bonds: RBI Retail Direct, treasury bills, listed NCDs on NSE and BSE, public NCD issues, and debt mutual funds.
- Set the equity portion at a level you can hold through a 30% fall, then rebalance yearly instead of reacting to headlines.
