MUMBAI: Fixed deposits have long been the default savings instrument for conservative Indian households. But as interest rates softened and FD returns slipped, more retail investors began moving into bonds in search of higher yields.
The shift has accelerated with the rise of online bond platforms that have made listed corporate bonds and non-convertible debentures, or NCDs, easier to access. A September 2025 report by Assocham and Crisil Intelligence showed the number of clients registered with Online Bond Platform Providers (OBPPs)—platforms that allow retail investors to buy and sell listed bonds online and regulated by the Securities and Exchange Board of India (Sebi)—rose to 560,000 in fiscal year 2025 from 350,000 in FY24. Monthly average retail volumes have grown at a compounded annual growth rate of around 20% since OBPPs were introduced in 2022.
Retail participation has risen rapidly, but investor understanding of bond risks has not kept pace.
Neha Juneja, founding member of EquiRize Securities, said retail investors have entered the bond market with different motivations—some seeking slightly higher returns than FDs, others treating bonds as high-yield fixed deposits, which she says is completely wrong. "People try to disregard risk," she said.
Credit risk
Satish Gangadhar Meda, 59, an IT freelancer, describes himself as a conservative investor who once stuck to AAA-rated or government-linked issuers. Like many retail investors, he invested in bonds issued by SREI, a Kolkata-based non-bank infrastructure financier, that carried an AA rating at the time.
The company entered insolvency in 2021 after defaulting on payments, shaking his faith in the ratings system. "SREI was AA-rated, and still we lost our principal," he said.
The company did not respond to emailed queries till press time.
Despite that experience, Meda continues investing in bonds as he scales back freelance assignments and seeks steady interest income. He said FD rates, now around 6%, are no longer attractive enough.
Over time, he has shifted 30-40% of his savings from fixed deposits into bonds, mainly through online platforms. He now limits himself to listed bonds with greater visibility. "I've burnt my hands once; I don't want to repeat it," he said. "The regulator should be tougher on rating companies. That's the only way we can trust an issuer we don't know personally."
Market participants say retail investors are often drawn to the very yields that signal elevated risk.
When companies launch public NCD issues offering coupons of 10-12%, it is often because institutional investors such as mutual funds, insurance companies and pension funds are unwilling to lend at lower rates.
"Once you're below AA, the institutional door starts closing," said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap.
He added that while some companies approach retail investors strategically and may issue bonds once or twice a year, others tap the retail market after struggling to raise institutional capital. The higher coupon, in other words, is often compensation for risks that larger, better-resourced investors have already rejected.
Amit Gopal, director at Paterson Wealth, said the risks of moving from FDs into bonds are two-fold: credit risk and liquidity risk.
He pointed to IL&FS as an example of how quickly assumptions around credit quality can unravel. "They were almost seen as quasi-government and there was this sense that they were too big to fail. Large institutions like the EPFO, mutual funds, and insurance companies also took a huge hit.”
Thin secondary market
Liquidity is another concern.
Retail investors are often drawn in by attractive coupon rates displayed on online platforms, Gopal said, but exiting those investments can be far harder.
"You should not make an investment assuming it will be held to maturity. There are times when you may want to exit. You should always be in a position to say: if I need my money back, I should be able to get it," he said.
India’s retail bond secondary market remains thin, making early exits difficult without taking a hit on price.
“When you buy at a low yield and want to sell, you have to sell at the prevailing market yield, which may mean accepting a lower price than you paid,” Srinivasan of Rockfort Fincap explained.
Bond prices and yields move inversely, meaning rising market yields push bond prices lower.
Complex structures
The risks increase further as retail investors move beyond plain-vanilla bonds into more complex debt structures.
Juneja of EquiRize Securities cited securitized debt instruments, or SDIs, as an example. SDIs pool together loans originated by one or more non-banking financial companies (NBFCs) and package them into tradable securities. Investor payouts depend on repayments from the underlying borrowers.
"Some nice words around this product like bankruptcy remote came and people invested without going beyond the terminology," she said.
Bankruptcy-remote structures use separate legal entities to ring-fence assets from the issuer’s balance sheet, theoretically protecting investors if the parent company runs into trouble.
But between August 2025 and January 2026, multiple retail investors in SDIs faced payment defaults after underlying loan pools originated by NBFCs turned non-performing assets.
Since then, trustees representing SDI investors have been voting on settlement proposals that effectively require investors to accept less than the full amount owed rather than pursue lengthy legal recovery proceedings.
Chennai-based Aravind Ganesh, who invests in bonds among other debt products, said brokers and platforms have expanded faster than investor protections. “Due diligence has to happen at a much higher scale.”
Calling SDIs “a very risky instrument”, Srinivasan said, “I always recommend people to go for a simple plain vanilla bond structure because retail investors are fairly new to the bond market.”
The checklist
Gopal said many Indians already have significant hold-to-maturity fixed-income exposure through EPFO and NPS without fully realizing it.
"Each of us puts money in EPFO. We should just consider that to be our debt component and then assess if we want additional fixed income exposure," he said.
For those who still choose to invest directly in bonds, Srinivasan recommends checking the credit rating, whether the bond is secured or unsecured, and whether it is listed or unlisted.
A secured bond is backed by specific company assets that can be liquidated if the issuer defaults.
"If the bond is fully secured, sooner or later the investor will get back their money," he said, adding that investors should also examine the company’s sector, operating history, profitability record and board composition.
Saurabh Jain, co-founder and chief executive of Stable Money, said AAA-rated corporate bonds are currently yielding between 7.5% and 8.5%, while state development loans, which sit just below central government securities in the risk hierarchy, offer yields 30-50 basis points above G-Secs.
“When a bond is offering returns materially above these levels — say, 200 to 300 basis points higher than a comparable AAA instrument — that premium exists for a reason. It is almost always reflecting credit risk, liquidity risk, or both. That does not make the product wrong, but it does mean the investor needs to understand what they are taking on rather than evaluating the product purely on the headline yield.”
Killol Pandya, fixed income head at JM Financial AMC, said barriers such as large minimum lot sizes, opaque pricing and non-standardised instruments have reduced over time for retail investors. But the core risks of interest-rate movements and defaults remain, he said, and require careful analysis and expert advice.
The bond market may offer higher yields than fixed deposits, but it also brings credit risk, thin secondary markets, complex instruments and recovery processes that can stretch for years. If investors do not understand why a bond is offering materially higher returns than a AAA-rated instrument, that gap in understanding is often where the risk lies.