Corporate Bonds: "Higher returns than FDs while prioritizing safety, makes it an attractive investment option," says Nikhil Aggarwal, Founder CEO of Grip Invest

The corporate bond market in India, at around $2.4 trillion (as on October 2023), offers retail investors a compelling alternative to traditional fixed-income instruments like fixed deposits (FDs), Public Provident Fund (PPF), Kisan Vikas Patra (KVP), etc. Unlike the recurring volatility of equity investments, corporate bonds provide stable, predictable, fixed interest payments, with returns disbursed monthly, quarterly, semi-annually, and not necessarily at maturity. 

Beyond stability, Nikhil Aggarwal, Founder CEO of Grip Invest, says that corporate bonds offer higher yield potential compared to FDs while prioritizing safety, making them an attractive investment option. Furthermore, corporate bonds provide maturity from 1 year to 5 years. 

He informs that the credit ratings associated with each bond enables investors to select bonds that align with their risk tolerance and investment horizon. "This results in wealth creation, accumulation, retirement planning and various other financial goals for non-institutional investors. Diversifying into corporate bonds can also help in spreading risk across various issuers and sectors, thereby reducing concentration risk," he adds.

Corporate bonds: What are the factors that impact yield expectations?

The Founder CEO of Grip Invest informs that the bond market has various terminologies such as yield or coupon rate, bond price, and their maturity profile—which are impacted due to changes in interest rates in the economy. He explains, "Bond prices tend to fall when interest rates rise, and vice versa. Also, the higher the bond tenure, the higher the sensitivity toward the movement in interest rates. However, bonds help maintain a diversified portfolio, offering investors a steady income source and potentially mitigating the volatility associated with stocks. Actual yields can vary depending on factors such as the specific issuer, maturity date, prevailing interest rates, credit ratings, and market demand for corporate bonds at any given time." 

Corporate bonds: How safe are they?

Bank Fixed Deposits offer conservative returns, typically around 5 per cent to 7 per cent per annum, while Aggarwal informs that corporate bonds yield higher returns, ranging from 7 per cent to 14 per cent per annum based on credit ratings. He adds, "Unlike FDs, which offer a low-risk return, corporate bonds introduce the element of credit risk – the possibility of the issuer defaulting on their debt obligations. This is most effectively represented by credit ratings. The relationship between creditworthiness and corporate bond safety is direct and demonstrably quantifiable. Bonds rated AAA to AA- are deemed the safest and offer yields ranging from 6 per cent to 10 per cent. Those rated A+ to A- offer yields between 10 per cent to 12 per cent, while BBB-rated bonds provide yields ranging from 13 per cent to 14 per cent." 

Corporate bonds: Tax treatment 

As is the case for Fixed Deposits, the interest income from corporate bonds is also received after deducting a 10 per cent TDS. The Founder CEO of Grip Invest informs that interest payments from bonds are also added to the investor's total income and taxed according to their income tax slab rate. There are, however, certain tax-saving bonds issued by specific entities that may offer tax benefits under Section 80CCF of the Income Tax Act.

Corporate bonds: Credit ratings are a valuable tool, not a crystal ball

While credit ratings play a crucial role in assessing the creditworthiness of a bond issuer, events like the sudden default on payment by certain financial institutions serves as stark reminders of their limitations. 

He avers, "For instance, DHFL was a prominent housing finance company in India (rated CRISIL A+ back in 2018, now rated as D) that faced financial troubles and defaulted on its debt obligations. Such events shock the market and raise concerns about corporate governance practices and risk management in the financial sector, indicating the need for comprehensive due diligence beyond credit ratings. Default rates in the corporate bond market in India typically hover around 2 per cent. Even then, the Indian investor must step in the corporate bonds market with a deeper analysis. Investors should examine financials, management, and economic factors to grasp risks and returns." 

Corporate bonds: Government initiatives to boost the bond market in India

Aggarwal believes that the future of the bond market seems extremely bright, and says that it is expected to grow significantly in the coming years, with projections suggesting that the market could double to Rs 100 lakh crore to Rs 120 lakh crore by 2030 because of the progressive role played by the SEBI, Reserve Bank of India and other regulators. 
"In a move to make Indian bond markets more accessible to retail investors, SEBI has reduced the minimum denomination of privately placed bonds to Rs 1 lakh from earlier Rs 10 lakhs. This may further be reduced to Rs 10,000 soon. This step reflects SEBI's confidence in attracting retail investors and signifies a broader effort to widen the investor base for bonds in India," he adds.

Corporate bonds: How can investors protect their capital?

Building a diversified corporate bond portfolio requires a strategic approach that balances risk and reward by spreading their investments across various bonds with different issuers, industries, and maturity dates. The Founder CEO of Grip Invest sums up, saying, "This diversification helps mitigate concentration risk and minimize the impact of potential defaults from any single issuer. They also need to consider bond duration and yield relative to investment goals and risk tolerance. Finally, they need to remain updated on market conditions, issuer performance, and any changes in credit ratings. Seek professional advice from regulated financial experts specialising in fixed-income investments, for personalised and actionable recommendations based on individuals financial situations and investment objectives. By implementing these strategies, investors can help protect their capital when investing in corporate bonds."