Bonds: the other half of the market

Reading for India · about 4 min

What this cluster is for

The bond market is larger than the stock market. It sets the interest rate on your home loan, it decides what governments can afford, and it is where most people's "safe" money actually sits. Almost nobody who owns it can explain what they own.

That is not the reader's fault. Fixed income is taught as vocabulary — coupon, yield, maturity, spread — and then sold as a product category called "low risk". The words get learned. The 2 numbers that decide whether you lose money never get looked at.

These 7 lessons are built the other way round. Each one ends with something you do on your own factsheet, your own fund, your own holdings, in about 3 minutes.

By the end of this cluster you will be able to:

Work out whether your fixed income is actually beating inflation after tax
Find the credit-rating breakdown of your own debt fund, and say in rupees how much of your money is lent to weak borrowers
Explain, out loud, why a bond's price falls when interest rates rise
Find the 1 number on your factsheet that says how much your "safe" fund can lose, and multiply it out in money
Build your own country's yield curve from 4 numbers and read its shape
Say how much of your portfolio needs the economy to keep growing
Read diluted earnings per share and see the shares that already belong to somebody else

Nothing here is a tip. Nothing here names a bond to buy. Everything here should still be useful to you in 2036, in a market that does not exist yet.

The one idea, if you read nothing else

A debt fund is not a fixed deposit with a better label.

A fixed deposit is a contract. A debt fund is a pool of prices. The number that tells you how far those prices can move is called duration, it is printed on the factsheet every single month, and almost nobody reads it.

If you only do 1 thing from this whole cluster, do the exercise in article 4.

The reading order

The articles build on each other. Read them in order the first time.

The instrument

Be the lender, not the owner: how bonds actually work — a bond is a loan you can sell. The coupon is fixed, the price is not, and only 1 of them is what you earn.
Credit ratings: what AAA and junk actually mean — a rating measures 1 risk only. Extra yield is a price for a named risk, and if you cannot name it, do not take it.

The risk nobody looks at

Why bond prices fall when interest rates rise — the coupon cannot change, so the price must. This is arithmetic, not a tendency.
Duration: how to measure a bond's true risk — the most important article in this cluster. Duration times the change in yield equals your loss, and the number is on your factsheet.

The signals

The yield curve: the chart that predicts recessions — what normal, flat and inverted mean, why the US signal failed from 2022 to 2024, and why the Indian curve is a different animal.
The business cycle: boom, bust, and where we are right now — 4 phases, and the difference between an indicator that describes the future and one that describes the past.

Where the 2 halves meet

Warrants and convertible bonds: when debt turns into equity — a warrant creates new shares out of nothing. That is why it costs you money even though you never bought one.

The checklist

Every article ends in an action. Collected here, they are one afternoon's work and they are the most valuable thing in this cluster. Tick them off as you go.

Before you buy any fixed income product

Name the borrower. Government, bank, large company, or small company. (1)
Yield minus inflation minus your tax rate. Write down the number even if it is negative. (1)
Credit quality breakdown: sovereign and AAA against AA and below. Convert the second figure into money. (2)
Modified duration × 1%, then × 2%. In money, not percentages. (4)
Compare the fund's duration with the years until you need this money. (4)
Check the Potential Risk Class cell — a letter and a number, on every Indian debt scheme document. (2, 4)

Before you buy a share

Diluted earnings per share, not basic. Calculate the gap as a percentage. (7)
Compare that gap with the same company 3 years ago. (7)
Outstanding warrants and convertible securities, in the quarterly shareholding pattern. (7)

Every quarter, on what you already hold

Fund's 1-year return minus its yield to maturity. That gap is what interest rates did to you. (3)
Rating profile again. Fund portfolios change and nobody sends you a letter. (2)
The 4 curve numbers: 3-month, 2-year, 10-year, 30-year. Then 2 subtractions. (5)
Your 4 buckets — needs growth, less sensitive, needs solvency, needs only rates. Any bucket over 70% is 1 position, not a portfolio. (6)

Habits that cost nothing

Download your fund's monthly factsheet once. Find the statistics box. You now know where it is forever. (3, 4)
Write 1 dated sentence about which phase of the cycle you think you are in. Read it again in 6 months. (6)
Never compare 2 debt funds on past return alone. (2, 4)
When a promoter is issued warrants, put a note in your calendar for 18 months later to check whether they converted. (7)

India and the United States, equally

Every article covers both markets at the same depth, and then does something most explanations skip: it says where the 2 differ and what that difference tells you.

In fixed income that third section matters more than anywhere else in this wiki, because the divergence is structural rather than cosmetic.

Retail Americans own bonds. Retail Indians own bond funds. An American can buy a Treasury for $100 with a maturity date and simply wait out a price fall. An Indian in an ordinary debt fund has no maturity date and receives the market price on the day they leave. The same interest rate move produces a temporary inconvenience for one and a permanent loss for the other.

The Indian corporate bond market is thin. Most Indian corporate bonds barely trade after issue. Credit risk and liquidity risk therefore arrive together, on the same day, for the same reason. That is what wound up 6 Franklin Templeton debt schemes in April 2020.

An Indian AAA and an American AAA are different grades. Indian domestic ratings are on a national scale anchored to the Indian government. Global ratings are not.

Indian debt fund taxation changed materially in 2023 and the rules were amended again afterwards. Every tax statement in this cluster is marked, because this is the single area where an out-of-date sentence does the most damage.

SDLs and G-Secs have no exact American equivalent, and neither does RBI Retail Direct, which is the most under-used facility available to an Indian saver.

Copied without translation, American fixed income advice quietly costs Indian readers money. Those sections are the translation.

A note on what this is not

These lessons are free, and they will stay free. They are the text version of the ideas in our video course, written for anybody who cannot spend money on learning right now.

Nothing here is advice on a specific bond, fund or company. Every current yield, tax rate and regulation is marked, because those change and the principle does not.

The goal is the same one it has always been: fewer people in the 95%.