Corporate Bonds in India: A Lucrative Alternative to Traditional Investments

corporate bonds in India

The financial market in India is changing, and people are now looking for other forms of investment that can provide better returns to make their future secure. Of these emerging options, corporate bond investments present themselves as an attractive alternative to the conventional FDs and equities. These debt instruments have become increasingly high profile due to their attractive yields, correlations and regulatory attractiveness for investors given their supply. With the Indian economy scaling new heights, corporate bonds are expected to be a key component in retail and institutional investment portfolios.

Understanding Corporate Bonds in India: A Foundation for Financial Growth

Corporate bonds refer to the debt securities that a company issues with an intention of generating income primarily for business enlargement, infrastructure development or even refinancing in owing debts. Corporate bonds are promises by large companies to repay the principal loaned plus an interest rate over a period in exchange for investors lending them money. These interest payments, often referred to as coupons, provide a stable and predictable income stream, making corporate bonds a popular choice for income-seeking investors.

Corporate bonds, unlike shares, reflect a financial commitment rather than ownership of a corporation. This distinction is critical because bondholders receive priority over shareholders in the case of a company’s collapse, making corporate bonds fundamentally safer than stocks. Furthermore, the diverse range of bonds available on the market, from highly secure government-backed securities to higher-yielding private-sector bonds, enables investors to customise their portfolios to their risk tolerance and financial objectives.

The Growing Popularity of Corporate Bonds in India

Corporate bonds in India have become increasingly popular in recent years, owing to a number of causes. The growing financialization of savings, in which families migrate from physical assets such as gold and real estate to financial instruments, has had a substantial impact on bond market growth. This move has created new opportunities for investors to diversify their portfolios beyond traditional outlets such as fixed deposits and savings accounts.

Furthermore, regulatory developments and government initiatives have contributed significantly to the growth of the corporate bond market. For example, the Reserve Bank of India (RBI) has issued new recommendations to improve openness and efficiency in the bond market. These restrictions, which include screen-based bidding for primary issuances and standardised price quotations, have enhanced price discovery and decreased information asymmetry, making corporate bonds more accessible and appealing to investors.

Moreover, the Securities and Exchange Board of India (SEBI) has taken steps to encourage retail investment in corporate bonds. SEBI has made it easier for individual investors to access and participate in corporate bonds by encouraging the use of Online Bond Platform Providers (OBPPs) and regulating transaction transparency. These measures, together with changing market dynamics, have made corporate bonds a viable and profitable alternative to traditional investments.

Advantages of Investing in Corporate Bonds

Investing in corporate bonds in India provides various benefits that make them appealing to both regular and institutional investors. These advantages include greater returns, liquidity and flexibility, capital gain potential, and safety.

1. Higher Yields

One of the main reasons investors are drawn to corporate bonds is their ability to provide higher yields than traditional fixed-income securities such as FDs. AAA-rated bonds issued by state-run corporations such as Power Finance Corp, REC, and Power Grid Corp, for example, have yield spreads higher than government bonds. This higher yield makes corporate bonds a more attractive investment alternative, particularly in a low-interest-rate environment.

2. Liquidity and Flexibility

Unlike FDs, which generally have set lock-in periods, corporate bonds provide more flexibility in terms of maturity and exit possibilities. Bonds can be exchanged on secondary markets, giving investors liquidity and the option to exit their investments before maturity. This function is especially useful for investors who need flexibility in managing their cash flows or reacting to changing market conditions.

3. Capital Gains Potential

Corporate bonds have the potential for financial gains, particularly when interest rates fall or the issuer’s credit rating improves. Investors who buy bonds at a bargain or during periods of higher interest rates may benefit from price increases as market conditions shift. This capital gains potential boosts corporate bonds’ profitability, giving them an appealing alternative to more static investment options such as FDs.

4. Safety and Security

In terms of security, corporate bonds make an appealing proposal. Government securities, for example, come with a sovereign guarantee, which ensures a high level of safety. Corporate bonds, particularly those issued by AAA-rated firms, are collateralized and have a lower credit risk than shares. Furthermore, unlike FDs, which are unsecured and only partially guaranteed, corporate bonds provide a safer investment alternative for risk-averse investors.

Regulatory Support and Market Evolution

The regulatory environment in India has aided in the growth and maturing of the corporate bond market. The RBI’s recent guidelines include various initiatives to improve openness, efficiency, and investor safety. For example, the mandated use of screen-based bidding for bond issuances with maturities greater than one year assures a fair and transparent procedure, whereas standardised price quotations increase price discovery and eliminate market inefficiencies.

Furthermore, the RBI has allowed banks to allocate up to 23% of their deposits to corporate bonds classified as held-to-maturity (HTM). This legal shift has sparked greater interest in corporate bonds, particularly among banks and financial institutions, because they provide better protection against mark-to-market volatility and provide consistent returns.

SEBI’s attempts to increase retail participation in corporate bonds have also helped the market flourish. SEBI has simplified the bond issuance procedure and enabled Online Bond Platform Providers (OBPPs), making it easier for individual investors to access corporate bonds and diversify their portfolios. These legal changes have produced a more favourable climate for the expansion of the corporate bond market, drawing both domestic and international investors.

Challenges and Risks in Corporate Bonds in India

Corporate bonds have many advantages, but they are not without hazards. Investors must be mindful of the risks linked with credit, interest rate, and market liquidity.

1. Credit Risk

Credit risk is the danger that the bond issuer would default on its financial commitments, resulting in possible losses for investors. While AAA-rated corporate bonds from government-backed organisations have a low credit risk, lower-rated bonds, particularly those rated below AA, are more risky. Before investing, investors should carefully analyse the issuer’s creditworthiness as well as the bond’s ratings.

2. Interest Rate Risk

Interest rate risk is another important factor to consider when investing in corporate bonds. When interest rates rise, the market value of current bonds tends to fall because newer bonds have higher yields. Conversely, as interest rates fall, the value of existing bonds may rise. Investors must be aware of the current interest rate environment and its impact on bond values, particularly if they intend to sell their bonds before maturity.

3. Market Liquidity

Liquidity risk refers to the difficulty of finding purchasers for bonds in the secondary market, especially for lower-rated or less popular issuances. While high-quality corporate bonds issued by well-known corporations are typically liquid, lower-rated bonds may be more difficult to trade, particularly during times of market instability. Investors should evaluate the bond’s liquidity before investing, especially if they need the ability to exit their investment early.

Strategic Shifts Among Indian Lenders

In response to updated RBI restrictions, Indian lenders are increasingly focussing on corporate bonds as a key investment category. This strategic move is primarily motivated by the attractive yield spreads given by corporate bonds over government securities, which make them a more profitable investment alternative for banks. Furthermore, regulatory improvements that allow banks to allocate a bigger amount of their deposits to corporate bonds have accelerated this trend.

Banks have demonstrated a strong preference for AAA-rated corporate bonds issued by state-run firms, which provide greater rates while posing less credit risk. This trend towards high-quality bonds is consistent with banks’ risk management practices and offers a safer investment alternative than equities. As a result, corporate bonds have become an important part of Indian lenders’ investment portfolios, helping to ensure financial stability and risk diversification.

Future Prospects of Corporate Bonds in India

The future of corporate bonds in India appears optimistic, with the market likely to expand significantly by 2030. The Indian government’s emphasis on infrastructure development, combined with increasing expenditure in key sectors, is expected to drive higher demand for corporate bonds as corporations seek to obtain financing for expansion projects. Furthermore, increased interest from individual and institutional investors, aided by regulatory actions, will fuel the market’s growth.

Furthermore, the introduction of new financial products, such as green bonds and ESG (Environmental, Social, and Governance) bonds, is projected to expand the investor base and increase market liquidity. These changes, together with India’s strong economic growth, indicate that corporate bonds will remain an attractive alternative to traditional investments, providing both stability and profitability.

Conclusion

To summarise, corporate bonds in India offer a compelling investment opportunity, with better returns, diversification, and safety than traditional investments such as FDs and equities. The corporate bond market is expected to grow greatly in the next few years, owing to legislative advancements and increased financialisation of savings. However, investors must carefully analyse the risks associated with corporate bonds, such as credit risk, interest rate risk, and liquidity issues. By navigating these risks and effectively adding corporate bonds into their portfolios, investors can benefit from a more diversified and resilient investing approach, ultimately meeting their financial objectives in India’s dynamic economic landscape.

FAQs

1. What are corporate bonds, and how do they differ from traditional investments?

Corporate bonds are debt securities that firms issue to raise cash and provide investors with a fixed income in the form of interest payments. Unlike stocks, which reflect ownership, corporate bonds are a loan to the issuer, making them a more secure investment. They offer better rates than traditional fixed-income securities such as fixed deposits (FDs) while being more secure than equities.

2. Why are corporate bonds considered a lucrative alternative in India?

Corporate bonds in India are becoming increasingly popular due to their attractive yield spreads, which can surpass 50 basis points above government securities. Furthermore, recent regulatory improvements have increased transparency and liquidity in the bond market, making it a desirable option for investors seeking higher yields and portfolio diversity.

3. How do regulatory changes in India impact the corporate bond market?

Recent regulatory measures implemented by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have increased market transparency and accessibility. For example, the implementation of screen-based bidding and standardised price quotations has improved price discovery, while SEBI’s support of Online Bond Platform Providers (OBPPs) has made it easier for retail investors to obtain corporate bonds.

4. How can I start investing in Corporate Bonds?

Investing in corporate bonds in India can be done through several platforms, including Online Bond Platform Providers (OBPPs). Examples of OBPPs include platforms registered with NSE (National Stock Exchange) Bond Platform and BSE (Bombay Stock Exchange) Bond Platform, where investors can buy and sell corporate bonds directly like Aspero, Wint Wealth, Jiraaf, etc.

Aspero is a popular SEBI registered online bond platform for investing in corporate bonds in India. The platform offers premium fixed income securities such as corporate and government bonds for investment to retail investors, independent financial advisors and large wealth distributors with yields ranging up to 15.5%. Aspero offers a large variety of investment grade bonds to choose from. Sign up now to start investing.