Should you invest in corporate bonds? Risks, returns and more

Corporate bonds are getting increasingly popular among investors who have some risk appetite and seek higher returns than traditional fixed-income instruments such as fixed deposits. Companies use corporate bonds, regulated by the Securities and Exchange Board of India (Sebi), to raise funds for operational growth and expansion. In exchange, investors receive fixed interest payments over a specified period.

Analysts say the corporate bond market has grown 10x after SEBI implemented the Request For Quote (RFQ) protocol in 2020, which facilitated digital trading and also increased transparency. Some high-yield bonds offer interest in the 9-14 percent per annum for a short-term investment horizon. However, returns and growth aren’t the only parameters to decide on investing in corporate bonds.

“Corporate bonds are worth exploring if you’re okay taking a little bit of risk than FDs. If you want more returns to create wealth, you eventually have to take some risk,” said Ajinkya Kulkarni, co-founder of investment platform Wint Wealth.

Investors should do their research before investing in corporate bonds — is this risk worth taking? Is the risk managed well? Is there a good enough collateral? Is the company’s history good and what is the likelihood of fraud?

Also read | Looking beyond fixed deposits? Here are 5 investment options to consider

Returns from corporate bonds, risk appetite

Corporate bonds are versatile instruments that vary widely based on key features such as credit ratings, interest structure, and collateral. These combined with factors such as liquidity and tax implications contribute to a higher risk profile compared to fixed deposits. Equities come with even a higher level of risk.

“Equity mutual funds mitigate risks really well. You can also do similar things in corporate bonds by mitigating risk,” Kulkarni said.

Corporate bonds yield high returns for short-term investment. The returns are usually measured as yield-to-maturity (YTM), which is the percentage of expected annual returns. Ratings, on the other hand, measure credit worthiness and the likelihood of default, which range from “D”, indicating high default risk, to “AAA”, the best rating.

For example, a corporate bond launched by Progfin in October, with a BBB+ rating, is offering 11.75 percent yield on maturity over a 14-month investment period.

Fund allocation and liquidity

“I still believe that for long-term wealth, equity is the way to go for investments over a 10-year horizon. If I need money back in a certain period of time less than that, then I would not put it in equity. If I’m okay with a little bit of risk, then I would put it in corporate bonds,” Kulkarni said.

Experts are of the view that corporate bonds with short maturity, up to five years, offer better returns. For a long-term horizon, equities tend to perform well. However, research is must, as it carries risk and fraud cases, too, are on the rise.

Corporate bonds can be purchased online at Sebi-registered online bond platform providers (OBPPs) like Grip and WintWealth, which act like fund managers. OBPPs attracts 1 percent fee, or more for managing investment and transaction in bonds.

It is crucial to do due diligence before putting your savings into corporate bonds, there is a risk of losing money and cases of fraud are rising too. As a rule of thumb, consult a personal finance adviser to understand the risks and build a well-balanced portfolio.