When I sat down to map my long-term money goals—parents’ medical fund, my child’s education, and a retirement that doesn’t depend on markets—I realised fixed income had to play a core role. The real decision was simpler than it looked: government bonds and corporate bonds. Whose promise do I want to rely on, and at what price?
Who is borrowing from me
Government bonds are issued by the Union or state governments to finance public expenditure. Their strength comes from the sovereign’s ability to tax and its policy credibility. Corporate bonds come from companies—PSUs and private firms—raising money to grow, refinance, or manage cash flows. Because businesses carry operating risk, the market usually demands a little extra yield from corporate issuers. That extra bit is the “spread” over comparable government paper.
What I actually weigh as an investor
I don’t chase the highest coupon. I look at yield to maturity (YTM) and whether the cash flows suit my needs. Prices move when interest rates move, so both government and corporate bonds carry interest-rate risk. Corporate bonds add credit risk—the chance that payments are delayed or missed. Ratings from CRISIL, ICRA, or CARE help me screen, but they are not guarantees. I still check leverage, cash-flow coverage, covenants, and whether the issuer has weathered tough cycles.
A working example from my notes
Suppose a five-year government bond yields 7.2% while a five-year AAA-rated PSU corporate bond yields 8.3%. That 1.1% spread is the market’s price for taking corporate risk over sovereign risk. If my goal needs reliability above all else, I lean to the sovereign option. If I can accept measured risk for incremental return, the PSU bond may deserve a slot—after I read the information memorandum and confirm liquidity.
Liquidity and access matter more than we admit
Government paper usually trades in deeper markets with tighter bid–ask spreads. Corporate bond liquidity varies widely; large, frequently issued names are easier to buy and sell than niche issuances. Before I commit, I check recent traded volumes, typical spreads, and whether I am comfortable holding to maturity if the market turns thin.
Tax and costs I plan for
Interest from both government bonds and corporate bonds is generally taxed at slab rates, while capital gains depend on holding period and listing status. Rules evolve, so I verify the latest provisions for my situation and account for transaction charges up front. Small frictions can add up over multi-year horizons.
My simple comparison checklist
- Purpose and horizon: Stability first or extra yield with oversight
- Quality: Rating level, covenants, security or charge, and promoter track record
- YTM, not just coupon: What is my true expected return if I hold to maturity
- Liquidity: Can I exit without giving up too much on price
- Diversification: Ladder maturities and avoid concentration in a single issuer or sector
How I use both together
Government bonds give my portfolio a steady spine and a link to macro policy. Corporate bonds help lift overall yield and add sector exposure when I am comfortable with the issuer’s fundamentals. Used together, they balance predictability with opportunity, which is exactly what most long-term plans need.
Comments
0 comment