Investment-grade bonds, i.e., bonds rated from ‘AAA’ to ‘BBB’, offer higher yields than bank fixed deposits (FD) of similar maturity profiles. Currently, they offer yields of up to 13% or even higher. Thus, the significant yield premium offered by corporate bonds can help investors earn higher inflation-adjusted returns.
At present, the highest interest rate slabs offered by private sector banks, public sector banks and small savings schemes for non-senior citizens stand at 7.20%, 6.75% and 7.70%, respectively, while the small finance banks as a category offer the highest FD slab rate of 8.05%.
Lower investment amount
At present, the government bonds are issued at face value of Rs 100 whereas corporate bonds issued through IPOs have face value of Rs 1,000. As bulk of the corporate bond issuances in India are made through private placements, Securities and Exchange Board of India (Sebi) has reduced the minimum face value amount for corporate bonds issued through private placements to Rs 10,000 to improve liquidity in the corporate bond market.
The lower entry point has made bonds more accessible for retail investors. It allows them to diversify their bond portfolios across issuers, credit rating and maturity profiles. Smaller ticket size also allows staggered investments, helping them achieving their financial goals.
Bond investors receive the face value amount of their bonds on maturity. This certainty makes bonds a safer choice. However, the actual degree of capital safety depends on the creditworthiness of the bond issuer. Investors should carefully review the credit ratings assigned by the credit rating agencies and invest in bonds whose credit risk profile aligns closely with their risk tolerance and return expectations.
Scope of potential capital gains
Investors can book capital gains by selling the bonds in the secondary market at prices higher than their purchase prices. Such gains can arise due to factors like falling interest rates, credit rating upgrades, increased investor demand, favourable liquidity conditions, etc.
For example, when policy or market rates fall, market price of existing bonds issued at higher coupon rates appreciate as fresh bond issuances are expected to be made at lower coupon rates. Note, that the impact of falling interest rates on existing bond prices will be higher on bonds having longer residual maturities.
Asset classes don’t always move in the same direction. Except for factors like interest rates and inflation rates, bond and equity returns usually have an inverse relationship.
During periods of downturns or corrections in equity markets, bonds usually preserve their market value while generating accrual income. As a result, maintaining a diversified mix of equity and bonds in one’s portfolio can help smooth out returns across market and economic cycles.
The writer is CEO, Paisabazaar