The corporate bond market in India, valued at approximately $22.4 trillion (as of October 2023), provides retail investors with an attractive alternative to traditional fixed-income instruments such as fixed deposits (FDs), Public Provident Fund (PPF), and Kisan Vikas Patra (KVP). Unlike the volatility often seen in equity investments, corporate bonds offer stability and predictability with fixed interest payments disbursed on a monthly, quarterly, or semi-annual basis, rather than just at maturity.
Nikhil Aggarwal, the Founder CEO of Grip Invest, highlights that corporate bonds not only offer stability but also present higher yield potential compared to FDs, making them a lucrative investment option. Additionally, corporate bonds come with maturity periods ranging from 1 year to 5 years, allowing investors to tailor their investments to their risk tolerance and investment horizon.
Aggarwal emphasizes the importance of credit ratings in helping investors choose bonds that align with their financial goals. Diversifying into corporate bonds can spread risks across different issuers and sectors, reducing concentration risk and potentially enhancing wealth creation and retirement planning for non-institutional investors.
Factors Influencing Yield Expectations in Corporate Bonds
The bond market is influenced by various factors such as yield or coupon rate, bond price, and maturity profile, all of which can be impacted by changes in interest rates. Aggarwal explains that bond prices tend to decrease when interest rates rise and vice versa. Despite this, bonds can help maintain a diversified portfolio, offering a steady income source and potentially mitigating stock market volatility.
Safety of Corporate Bonds
While Bank Fixed Deposits offer conservative returns, corporate bonds provide higher returns ranging from 7% to 14% per annum based on credit ratings. Aggarwal notes that corporate bonds introduce credit risk, represented by credit ratings, with higher-rated bonds offering safer investments and lower yields, while lower-rated bonds come with higher yields but increased risk of default.
Tax Treatment of Corporate Bonds
Similar to Fixed Deposits, interest income from corporate bonds is subject to a 10% TDS deduction and taxed according to the investor’s income tax slab rate. Certain tax-saving bonds may offer benefits under Section 80CCF of the Income Tax Act.
Role of Credit Ratings in Corporate Bonds
While credit ratings are crucial in assessing bond issuer creditworthiness, recent events of default by financial institutions serve as reminders of their limitations. Aggarwal stresses the importance of comprehensive due diligence beyond credit ratings, including examining financials, management, and economic factors to understand risks and returns.
Government Initiatives and Future Outlook
Aggarwal is optimistic about the future growth of the bond market in India, with projections suggesting significant expansion by 2030. Regulatory initiatives by SEBI and the RBI aim to make the bond market more accessible to retail investors, indicating a positive trend in widening the investor base for bonds in India.
Protecting Capital in Corporate Bonds
Building a diversified corporate bond portfolio requires a strategic approach that balances risk and reward by spreading investments across different bonds. Aggarwal advises investors to consider bond duration, yield, and market conditions, seeking advice from financial experts specializing in fixed-income investments for personalized recommendations.
