Retail participation in the bond market lags behind that in the equities market. Low awareness levels coupled with liquidity concerns keep away retail investors, explains Christina Titus, as the markets regulator tries to boost participation via incentives to certain categories of retail allottees
What keeps retail investors on the sidelines?
The Indian financial markets have witnessed significant growth over the years supported by the increased enthusiasm shown by retail investors in the equity market. The bond market, however, has not seen that kind of participation from individual investors. Retail participation is in low single digits— market players put it below 4%.
Awareness is the biggest challenge for retail investors when it comes to investing in the bond market. They often find it difficult to understand the nuances of the bond market and its risk-return dynamics. Unlike equities, which most investors find easier to comprehend, bonds come with intricate concepts such as coupon rates, yields, credit ratings and maturity periods.
Mostly, they are not aware of the benefits of investments in debt and how these will help them to diversify their portfolio. In addition, investor access to the bond market, especially the secondary market, remains very limited. Investors also prefer to go after the higher returns offered by the equity market instead of the stable returns from bonds.
Secondary market liquidity is still a concern
Unlike equities, bonds are not liquid thus making exit difficult for retail investors. In case of corporate bonds, only AAA-rated bonds or those by select top-rated issuers easily find buyers in the secondary market. Moreover, most of the trading in corporate bonds still happens over-the-counter, reducing the transparency in price discovery.
Majority of the bond issuances are private placements, making them largely inaccessible to individual investors. As a result, the market is dominated by institutional players. Mutual funds, insurance companies, banks, and pension funds hold the major share of outstanding bonds.
Market making mechanisms and deeper repo markets would help to address the challenge of liquidity to some extent, say market participants. Moreover, allowing direct participation in exchange-traded platforms would make the market more accessible.
Unfavourable taxation norms
The existing tax framework also does not provide enough incentives to encourage wider investor participation. Investments in bonds do not get any tax benefits. The government had revised the tax treatment of debt mutual funds in 2023, abolishing the indexation benefits applicable for long-term capital gains.
Currently, listed bonds held less than 12 months are taxed at the income tax slab rate under short-term capital gain (STCG), while bonds held for more than 12 months are taxed at 12.5% without indexation benefit.
Sebi’s latest attempts
The corporate bond market gained momentum after the Securities and Exchange Board of India (Sebi) reduced the minimum investment size to `10,000 from `1 lakh in 2024. In 2022, it had introduced a regulatory framework for Online Bond Platform Providers for online bond trading. In February 2025, it launched a platform called Bond Central, aimed at creating a centralised, transparent database for bond issuances.
In its latest move, Sebi has proposed to allow debt issuers to offer incentives, such as higher coupon rates or discounts on issue price—to certain categories of investors in public issues of non-convertible debentures. The select categories include senior citizens, women, armed forces personnel and retail subscribers. It also has plans to build derivative trading for corporate bond indices and initiate a campaign to create awareness among investors on the fixed income market.
RBI’s proactive approach
The Reserve Bank of India (RBI) launched the Retail Direct portal in November 2021 to promote retail participation in government securities. This allowed retail investors to buy government securities (G-Secs) in primary auctions as well as buy and sell G-Secs in the secondary market.
In August 2025, it introduced systematic investment plans facility for investment in treasury bills in the central bank’s Retail Direct scheme. Total primary subscriptions through primary auctions were at Rs 7,543.96 crore as on November 10 compared to Rs 5,624.85 crore a year ago. Total traded volume in the secondary market is Rs 5,775.56 crore, up from Rs 941.57 crore a year ago.
The road ahead
According to market participants, retail investment has risen in recent years, particularly in lower-rated bonds, as investors seek alternatives to traditional fixed deposits which offer lower returns during a rate-cut cycle. Having said that, it is still underpenetrated and lagging behind global peers. Much work remains in expanding more participation, improving liquidity, and attracting a broader investor base.
Market participants call for a regulated distribution framework to further deepen the market. Some sections of the market argue that the ticket size should be reduced further to increase accessibility. The recent developments and remarks from officials across various platforms indicate that Sebi is moving with renewed energy to strengthen and expand the corporate bond market.