As interest rates on traditional Fixed Deposits (FDs) continue their downward trajectory, a growing number of Indian investors are casting their gaze towards corporate bonds, seeking avenues that promise better returns without significantly compromising on safety. But can corporate bonds truly fill the shoes of the beloved, low-risk FD? The answer, experts suggest, lies in a careful understanding of risk, return, and individual financial goals.
For years, FDs have been the cornerstone of conservative Indian investment portfolios, lauded for their assured returns and capital safety, backed by deposit insurance of up to ₹5 lakh. However, with leading banks currently offering FD rates in the range of 5.5% to 7.4% (with senior citizens often getting a marginal uplift), investors are finding their real returns eroded by inflation.
This is where corporate bonds enter the spotlight. "Corporate bonds stand out mainly because of their higher return potential," says Saurav Ghosh, co-founder at Jiraaf, an online bonds platform. He notes that "AAA and AA-rated corporate bonds can provide anywhere between 7.5% and 9%, sometimes even more," a significant premium over typical FD rates. This higher yield is a major draw for investors looking to optimize their fixed-income portfolios.
The Indian corporate bond market is also witnessing a resurgence, with increased trading volumes and a rise in new issuances. Companies are increasingly turning to bonds as an alternative to traditional bank financing, creating a more diverse investment landscape. Moreover, the Reserve Bank of India's (RBI) accommodative stance and potential for further rate cuts in 2025 could further benefit bondholders by making existing higher-yielding bonds more attractive. India's inclusion in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) is also expected to attract substantial foreign capital into Indian debt markets, further bolstering liquidity and demand.
However, it's crucial to acknowledge that while offering better returns, corporate bonds are not without their own set of risks. Unlike FDs, which are insured, corporate bonds rely on the issuer's creditworthiness. The most prominent risk is credit risk, or the possibility that the issuing company might default on interest payments or principal repayment. "Credit risk is topmost: if a company's financial health falters, it may default on coupons or principal," warns Vishal Goenka, co-founder of IndiaBonds.
To mitigate this, financial advisors strongly recommend sticking to investment-grade bonds, typically rated AAA or AA by agencies like CRISIL, ICRA, or CARE. These ratings signify a high level of creditworthiness and a lower probability of default. Diversifying investments across multiple issuers and sectors is another prudent strategy to spread risk.
Other risks include interest rate risk, where rising market interest rates can decrease the value of existing bonds, and liquidity risk, which refers to the ease with which a bond can be sold in the secondary market before maturity. While corporate bonds generally offer more flexibility than FDs in terms of secondary market trading, some may not have readily available buyers.
From a taxation perspective, while interest income from FDs and unlisted bonds is taxed at individual slab rates, listed corporate bonds offer some tax advantages. For listed bonds held for over 12 months, long-term capital gains are taxed at 12.5% with an exemption on the first ₹1.25 lakh of gains in a financial year, making them potentially more tax-efficient than FDs, where the entire interest is taxed at the highest slab.
In conclusion, for investors seeking to move beyond the diminishing returns of FDs, well-rated corporate bonds present a compelling opportunity for better yields. However, it's not a direct swap. A thorough understanding of credit ratings, the issuer's financial health, and one's own risk appetite is paramount. While FDs offer absolute safety, corporate bonds, with their carefully chosen counterparts, can indeed offer better returns with a reasonable level of safety, making them a viable and increasingly attractive component of a diversified investment portfolio in the current economic climate.