IL&FS crisis a big lesson for investors - experts advice these cautions while investing in corporate bonds

Infrastructure Leasing and Financial Services (IL&FS) defaulted on loan repayments last year, triggering panic in the market as mutual funds, pension funds, and retails investors have exposure to the company. Net asset values of at least 25 mutual funds, which reportedly hold Rs 2,700 crore of bonds and commercial papers of the company, have been hit after credit rating agencies downgraded the ratings of debt securities issued by IL&FS and its subsidiary IL&FS Financial Services. Thousands of investors in these mutual funds and individuals who had bought debt securities of the company also took a big hit.

Debt instruments are often considered as safer investment avenues than equity investments. IL & FS crisis is a big lesson for investors as they are often lured by the higher interest rates, running the risk of losing their money in case of any eventuality. Experts warn that investors should not fall for higher interest rates as many companies with lower credit ratings promise much higher returns than the AAA-rated bonds.

Mumbai-based tax and investment expert Balwant Jain told Zee Business Online that individuals must be careful while investing in corporate debt instruments like bonds and non-convertible debentures as many companies with lower credit ratings offer to borrow money from investors with higher interest rates. They must check the ratings of the companies before investing in them, he said. 

"Companies with higher credit ratings offer lower rates and these rates are often just slightly higher than the fixed deposits. That is the reason, many people are lured by the higher interest rates, without factoring in the risk factor. They must go for AAA-rated corporate debt instruments which ensure higher security,"  Jain said. 

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The expert, however, said investors may take a calculated risk as risk provides higher yields. Investors must know how much risk they can take and their ability to bear the loss. 

Jitendra Solanki, a SEBI-registered investment expert, told Zee Business Online, "The investors must take calculated risk to get a better return, but they must be aware that they are investing in a risky asset and that they can bear that much hit in case of invested company failing to repay their committed amount on maturity. The other problem with the low-rated corporate securities is that investors find it difficult to liquid them on the secondary market, as no one will buy these for the risk factor."

He said that investment decision should be taken carefully, as balancing the investment portfolio is important. One has to take a calculated risk for better returns. Conservative investors should either go for AAA-rated corporate bonds that offer slightly higher interest rates than fixed deposits, but these are more secure. They may also invest in government securities. 

"All depends on the period they (investors) want to stay invested. Bonds are generally offered for one year to five years duration. IL &FS crisis is a one-off incident, where even credit rating agencies had failed to raise red flags," he said. Investment decisions are also guided by the individuals' income and risk appetite. However, debt instruments are largely safer investments than equity, Solanki said. He further said that following the IL&FS crisis, market regulator SEBI has issued guidelines to safeguard investors. These guidelines hopefully will provide investors more safeguard against such eventuality.