At a time when equity returns remain flat, investing in corporate bonds can offer better returns than traditional fixed-income assets. The yields range from around 8-10% for AA-rated issuers and 11-14% for BBB-rated ones.
Investors should spread their money across several bonds with staggered maturities and interest-payment dates. Since these pay interest monthly or quarterly or yearly, this ensures predictable cash flow through the year. Therefore, a bond ladder can serve as a fairly dependable income stream that works in tandem with a pension or annuity.
Look at higher-rated bonds
Corporate bonds range from very safe to genuinely risky, depending on the issuer. A top-rated bond from a large, well-run issuer sits close to the safest end of the spectrum. In contrast, a lower-rated bond that pays investors more will carry a higher risk of delayed or missed payments. Since a corporate bond is not covered by deposit insurance, it’s the credit quality of the issuer that the investor is actually buying.
For retail investors, the prudent approach is to favour higher-rated, well-known issuers. Mid-teen yields are offered by lower-rated issuers such as smaller non-banking finance companies, microfinance and SME-focused lenders. Vishal Goenka, co-founder, IndiaBonds.com, says retail investors should not invest in BBB or BBB- rated bonds as these carry significant credit risk. “They are best left to institutions and specialist credit investors to analyse underlying risks that are commensurate with the high returns,” he says.
The market regulator has steadily lowered the entry barrier and online platforms have made buying a bond almost as simple as buying a mutual fund. A number of newer bonds are issued at a Rs 10,000 face value and some publicly issued bonds come at Rs 1,000. Higher-rated bonds in the AA category usually have Rs 1 lakh as the minimum investment amount.
Each bond has a fixed maturity date, which can range from a few months to 10 years or more. To exit early, investors can sell the bonds in the secondary market. But how easily they can do that, and at what price, depends on how liquid that particular bond is.
What to factor in
The first thing to look at is the issuer, not the yield. They must see if the business generates enough cash to service its debt comfortably. Then, the maturity, which should line up with when they need the money. Investors must look at the yield-to-maturity (YTM) rather than just the headline coupon. That is the actual return if they hold on to the end.
For someone who buys a bond intending to hold it to maturity, the return is essentially fixed on the day they buy. Nishchay Nath, founder & CEO, BondScanner, says investors should keep an eye on the issuer’s health. “A rating downgrade or bad news about the company matters far more than a few basis points of yield movement in the market,” he says.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Investors should assess their financial goals, risk appetite and consult a qualified financial advisor before making investment decisions.
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