Imagine you are at a crossroads on the path to investment: one path leads to bonds – solid, dependable, and predictable; the other takes you to debentures – flexible, with the potential for higher returns but also a bit more risk. Both are forms of debt instruments, yet they play distinct roles in the financial landscape.
What is a Bond?
A bond is a debt security in which an investor lends money to a borrower (typically a corporation or government) for a defined period at a fixed interest rate. In return, the borrower agrees to pay back the loan’s principal (the bond’s face value) on a specified maturity date, along with periodic interest payments, known as “coupons,” until the maturity date. Bonds are commonly used by entities to raise capital, offering investors relatively stable returns compared to stocks.
Additionally, if you’re looking to invest in bonds, you can conveniently apply for an instant personal loan at StashFin. This will allow you to use the loan amount to purchase the bonds you desire, making it easier to finance your investment in both bonds and loans.
Let’s consider this example: The government requires INR 1000 Crores to come up with new infrastructure. Rather than considering a bank loan, the government issues bonds to investors. Each bond is worth INR 10k. If the investor buys one bond, the person will receive fixed interest; let us assume 7 percent annually. At the end of the bond’s term (like 10 years), they will receive the INR 10k back.
What is a Debenture?
A debenture is a type of long-term debt instrument that companies or governments use to borrow money from investors, similar to a bond. However, unlike many bonds, debentures are typically unsecured, meaning they are not backed by any collateral, such as assets. Instead, they rely solely on the issuer’s creditworthiness and reputation.
Debentures pay a fixed interest rate over a specified period, and the principal amount is repaid at maturity. They are often used by companies with strong credit to raise funds without pledging specific assets, making them riskier for investors but potentially offering higher returns.
Suppose Company ABC, a well-established corporation, needs funds for expansion. Instead of taking a bank loan, it issues non-convertible debentures (NCDs) to investors at a 10% annual interest rate for five years. Investors receive fixed interest payments annually, and at maturity, the company repays the principal.
Key Differences Between Bonds and Debentures
To make the best financial decision, you need to understand the difference between bonds and debentures. The following are some key differences. Between bonds and debentures:
| Factor | Bonds | Debentures |
| Security & Collateral | Secured by assets or collateral, ensuring investor protection. | Unsecured, relying solely on the issuer’s creditworthiness. |
| Issuer | Issued by governments, corporations, and financial institutions. | Issued mainly by corporations for capital raising. |
| Risk | Lower risk due to security and legal protections. | Higher risk, especially if the issuer has a weak credit profile. |
| Interest Rates | Lower interest rates due to lower risk. | Higher interest rates to compensate for added risk. |
| Tenure | Typically short- to medium-term. | Usually long-term financing instruments. |
| Repayment Priority | Bondholders have higher priority in repayment in case of liquidation. | Debenture holders are repaid after bondholders. |
Pros and Cons of Bonds and Debentures
| Factor | Bonds (Pros) | Bonds (Cons) | Debentures (Pros) | Debentures (Cons) |
| Income Stability | Provides regular interest payments, ensuring a stable income. | Lower potential returns compared to stocks and debentures. | Higher interest rates offer better returns. | Higher risk due to lack of security. |
| Risk Level | Generally low-risk, especially government bonds. | Credit risk exists if the issuer’s financial stability is weak. | Suitable for long-term goals with sustained income. | Relies heavily on the issuer’s creditworthiness, impacting value. |
| Liquidation Priority | Bondholders are prioritized in case of bankruptcy. | Bond prices fluctuate with changing interest rates. | Companies can raise capital without collateral. | Debenture holders have lower priority in repayment. |
| Portfolio Benefits | Helps diversify portfolios with low correlation to stocks. | May not offer high growth potential like equities. | Potential for higher returns due to increased interest rates. | Risk of default is higher if the issuer faces financial trouble. |
| Investment Options | Wide range of bonds, including government, corporate, and municipal bonds. | Can be affected by inflation, reducing real returns. | More flexibility in investment structure. | Less secure compared to bonds, increasing investor risk. |
Where Can You Buy Bonds and Debentures?
Once the difference between bonds and debentures is clear, you should know about ways to invest in them:
1. RBI Retail Direct: The RBI allows investors to buy government bonds directly from the RBI Retail Direct portal. It serves as a secure and easy option for investors looking for reliable, low-risk investment options.
2. Stock Exchanges: You can spot debentures and bonds listed on stock exchanges, including both NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Through these stock exchange, investors can trade these financial instruments by applying through online trading platforms or brokers.
3. Mutual Funds and Debt Funds: Investors can invest in bonds directly with the help of debt mutual funds. This manages a diversified portfolio of debentures and bonds.
4. Banks and Financial Institutions: There are several banks and NBFCs (Non-Banking Financial Companies) offering debentures and bonds as reliable, fixed-income investment options.
5. Bond Market Platforms: You can also come across specific online platforms, like NSE GoBID, that ensure that investors are able to buy government and corporate bonds conveniently.
In the context of buying debentures and bonds, Stashfin’s parent company, AKARA Capital Advisors Pvt. Ltd., has recently issued NCDs or Non-Convertible Debentures with a face value of INR 10k. This initiative is along with the amendments by the SEBI (Securities and Exchange Board of India) in which the minimum face value of debt securities was reduced from INR 1 Lakh to INR 10k.
Factors To Consider When Choosing Bonds and Debentures
You may go through the following factors when choosing between bonds and debentures.
- Risk Tolerance
• Bonds: Generally considered safer investments, especially when issued by the government or financially stable entities. They tend to be less volatile, making them a good choice for conservative investors.
• Debentures: As they are unsecured, debentures come with higher risk. If the issuer defaults, debenture holders are not backed by collateral. However, higher risk often comes with higher potential returns. - Returns
• Bonds: Typically offer lower returns compared to debentures, especially if they are government bonds or highly rated corporate bonds. The primary appeal is their stability and security.
• Debentures: Offer higher interest rates as compensation for the increased risk of being unsecured. For investors willing to accept a bit more risk, debentures can provide greater returns. - Liquidity and Market Conditions
• Bonds: Bonds, particularly government bonds, tend to have higher liquidity. They can be easily bought and sold on the secondary market, making them suitable for investors who may need to access cash quickly.
• Debentures: Debentures, especially those issued by private corporations, may have less liquidity and can be harder to trade. It is especially true for debentures that are issued by companies with lower credit ratings. - Priority in Bankruptcy
• Bonds: Bondholders have a higher claim on assets in the event of issuer bankruptcy. If a company defaults, bondholders are paid before debenture holders.
• Debentures: Debenture holders are unsecured creditors and are paid after bondholders and other secured creditors. It makes them riskier during financial distress situations. - Suitability for Long-Term or Short-Term Goals
• Bonds: Bonds are the best for a long-term, consistent income. If you require a safe and stable source of income with less risk, then perhaps the best option would be bonds, specifically government bonds.
• Debentures: For investors who could accept higher returns but were not necessarily capable of taking larger risks, debentures would be appealing. They are applicable for investment to those who can accept and tolerate middle to high-risk investments.
Bonds vs. Debentures: Which One to Buy in 2025?
Do you wish to invest in fixed-income investment securities in 2025? In this case, it is important to understand the difference between bonds and debentures to make the best financial decision. This consideration is crucial after understanding what is bond and debentures.
With respect to bond and debenture differences, debentures are a type of unsecured debt instrument issued by large-scale companies. They usually come with higher interest rates in comparison to government bonds. However, debentures do not feature collateral backing. Therefore, they are slightly riskier.
In 2025, investors who seek steady returns and overall safety, they can consider investing in government bonds. On the other hand, if you are looking for higher yields with some risk that can be managed, you can explore the option of NCDs and other corporate debentures.
Bottom line
There is no one-size-fits-all answer when it comes to bonds vs debentures, and the best one for you will depend on your financial goals, level of risk tolerance, and where you are in your investment horizon.
Understanding what bonds and debentures are is imperative for any investor, and after a proper understanding of this topic, one may visit the StashFin website which is a one-stop destination for all kinds of financial investments. We do hope this blog brings clarity for you on what are the differences between bond and debenture.
Frequently asked questions
1. Can I invest in both bonds and debentures at the same time?
Absolutely, you can invest in both bonds and debentures at the same time. Many investors do this. They opt for diversification of their investment choices in order to have balanced risks and returns.
2. Are bonds safer than debentures?
Generally, bonds are safer than debentures since they have more collateral backing, and default risks are relatively lower, thereby displaying more creditworthiness from the issuer. However, debentures can be returned at higher yields, which has attracted investors to take on the risk of investment in these debentures.
3. How do interest rates differ for bonds vs. debentures?
Bonds tend to offer lower interest rates because bonds are thought to be a better (and safer) investment, especially if the bonds come from a government or company with high rankings.
Debentures, being issued without security and therefore riskier, tend to include more interest to value for the added risk of default.
4. Can bonds or debentures be converted into equity?
Of course, bonds or debentures can be converted into equity under certain conditions, but the specifics depend on the type of bond or debenture.
5. Do bonds or debentures offer better liquidity?
Bonds generally offer better liquidity than debentures.
6. Which has a longer maturity period: bonds or debentures?
Debentures usually have a longer maturity period than bonds.
7. Do bonds and debentures have different payout structures?
Yes, bonds have fixed interest payments, while debentures may have variable or deferred payouts.
8. Are corporate bonds safer than corporate debentures?
Yes, corporate bonds are generally safer since they are often secured.