Investors in India often evaluate fixed-income investments by looking at one number, the interest rate. Whether it’s a corporate bond offering 8.25%, a bank FD at 7.5%, or a debt mutual fund delivering 7% annualised returns, the instinct is simple: higher is better.

But yield alone is not a sufficient decision-making metric.

The right fixed-income investment is determined by risk structure, liquidity, taxation, and interest-rate sensitivity, not just return.

This guide provides a structured framework tailored to Indian markets, enabling investors to compare fixed-income options beyond headline returns.

Where Do We Stand? Indian Rate & Inflation Context

Any fixed-income comparison in India must begin with macro context.

• The benchmark 10-year Government of India (G-Sec) yield is typically tracked via securities issued by the Reserve Bank of India.
• Policy rates are determined by the Monetary Policy Committee (MPC) of the RBI.
• Inflation data is published by the Ministry of Statistics and Programme Implementation, which releases CPI figures monthly.

Why this matters:

• If the repo rate is high, newly issued bonds offer higher coupons.
• If inflation rises, real returns shrink.
• If yields fall, long-duration bonds gain in price.

Without understanding this backdrop, comparing two 8% instruments can be misleading.

Look at Total Return Not Just Coupon

In India, investors commonly compare:

• Corporate Bonds
• Government Securities (G-Secs)
• State Development Loans (SDLs)
• Bank Fixed Deposits
• Debt Mutual Funds
• Target Maturity Funds

The key difference:

Coupon/Yield tells you what you earn annually.
Total Return tells you what you actually make over your holding period.

For example:

• A long-duration G-Sec fund may deliver strong gains if yields fall.
• The same fund may generate mark-to-market losses if yields rise.

Debt mutual funds reflect daily NAV changes, unlike FDs which appear stable.

Professional investors focus on expected total return over a defined horizon.

Measure Interest Rate Risk: Duration Matters

In India, duration plays a critical role, especially when the rate cycle shifts.

Duration estimates how much a bond’s price changes if yields move by 1%.

• Short-term bond funds → lower duration → lower volatility
• Long-duration G-Sec funds → higher duration → higher sensitivity

For example:
If a fund has 6-year duration and yields rise by 1%, NAV could fall roughly 6%.

This is why investors often experience temporary losses in long-term debt funds during tightening cycles.

When comparing two 7.5% yielding instruments, the one with shorter duration may carry significantly lower risk.

Credit Risk: Higher Yield = Higher Default Probability

India’s bond market offers both:

• AAA-rated PSU bonds
• AA / A-rated corporate bonds
• Lower-rated high-yield instruments

Ratings are assigned by agencies such as:

• CRISIL
• ICRA

If a bond yields 9.5% when G-Secs yield 7%, the 2.5% spread reflects credit risk.

History shows that credit events in India can impact liquidity and valuations sharply, especially in lower-rated segments.

Always ask:

• What is the rating?
• What is the credit spread over G-Sec?
• What is the issuer’s balance sheet strength?

Yield premium exists for a reason.

Liquidity Risk in Indian Markets

Liquidity varies significantly across instruments:

Instrument	Liquidity Level
G-Secs	High
SDLs	Moderate
PSU Bonds	Moderate
Lower-rated corporate bonds	Low
Bank FDs	Illiquid (premature penalty)

Debt mutual funds may face redemption pressure in volatile periods.

Before investing, consider:

• Can you exit early?
• What is the bid-ask spread?
• Is there lock-in?

Liquidity risk is often underestimated in India.

Taxation: A Major Deciding Factor in India

Tax rules significantly impact fixed-income decisions.

As per current taxation structure:

• Debt mutual funds are taxed at slab rate (no long-term capital gains indexation benefit for newer investments).
• Bank FD interest is taxed at slab rate.
• Capital gains on listed bonds may differ based on holding period.

An 8% FD for someone in the 30% tax bracket effectively becomes ~5.6% post-tax.

Always compare post-tax yield, not headline yield.

Inflation: Calculate Real Return

If CPI inflation runs at 5% and your bond yields 7%, your real return is only 2%.

Inflation erodes purchasing power over time.

For long-term investors:

• Consider instruments aligned with inflation expectations.
• Avoid locking into low real yields for extended periods.

Real return analysis separates disciplined investors from yield chasers.

Reinvestment Risk

In India, when rates fall:

• Maturing FDs may have to be reinvested at lower rates.
• Coupon payments from bonds earn lower reinvestment returns.

Long-term bonds reduce reinvestment risk but increase duration risk.

There is always a trade-off.

Match Investment With Objective

Different investors require different structures.

For Capital Protection

• Short-term G-Secs
• Treasury Bills
• Overnight/low-duration funds

For Stable Income

• AAA PSU bonds
• Banking & PSU debt funds
• Target maturity funds

For Tactical Rate Play

• Long-duration G-Sec funds
• Dynamic bond funds

Return comparison without goal alignment leads to poor allocation.

Professional Fixed-Income Comparison Checklist (India)

Before choosing an instrument, ask:

1. What is the benchmark G-Sec yield?
2. What is expected total return over my holding period?
3. What is duration?
4. What is credit rating and spread?
5. What is liquidity profile?
6. What is post-tax return?
7. What is real return after inflation?
8. Does this align with my objective?

If two instruments offer similar yields, the one with:

• Better credit quality
• Lower duration (if rate risk is high)
• Higher liquidity
• Better tax efficiency

…is usually the superior choice.

Final Thoughts

India’s fixed-income landscape has evolved significantly from simple bank FDs to dynamic debt funds and target maturity ETFs.

But one principle remains constant:

Higher yield always comes with higher risk whether that risk is credit, duration, liquidity, or tax inefficiency.

Sophisticated investors do not chase returns; they evaluate risk-adjusted efficiency.

By applying a structured framework benchmark context, duration, credit risk, liquidity, taxation, inflation, and objective alignment investors can make informed decisions that preserve capital and optimise income across market cycles.