Exploring the viability of secured corporate bonds with a 9-11% return compared to Fixed Deposits (FDs): Insights from a leading wealth expert.
“These bonds carry both credit and interest risks. Consequently, it is crucial to thoroughly evaluate the creditworthiness of the issuer prior to making an investment decision, or alternatively, explore investment options through a diversified debt fund.”
Due to the recent surge in interest rates, corporate bonds are currently offering significantly higher returns compared to fixed deposits. To illustrate, corporate bonds are providing interest rates ranging from 9-11%, whereas fixed deposits, with a tenure of one to three years, offer an average interest rate of 6-7%. Although the allure of higher returns is evident, it’s crucial to acknowledge that corporate bonds come with higher risks compared to fixed deposits. These risks include both credit risk and interest risk. Therefore, it is essential to thoroughly assess the creditworthiness of the issuer before making any investments. Alternatively, one may consider investing in corporate bonds through a diversified debt fund to mitigate risks. Furthermore, it is advisable to avoid concentrating all funds in either bonds or fixed deposits from a single issuer to ensure a more balanced investment approach.
Ajinkya Kulkarni, the Co-Founder and CEO of Wint Wealth, elucidates the enhanced returns associated with corporate bonds in contrast to fixed deposits. He also highlights essential factors for investors to consider. Wint Wealth, a fintech platform, streamlines investment processes in fixed-income products for both retail and high-net-worth individuals. Notable backers include Nithin Kamath (Zerodha), Lalit Keshre (Groww), Nitin Gupta (PayU), Kunal Shah (CRED), among others.
BT: What is the potential for returns with corporate bonds? Which particular bonds are suitable for investments aiming at a yield of 10 percent or higher?
AK: Prior to delving into corporate bond investments, it’s crucial for investors to grasp the nature of the asset class, understand the associated risks, and evaluate the potential gains. While long-term equity investments traditionally offer high returns, they come with inherent volatility. On the other hand, bank fixed deposits (FDs) provide guaranteed fixed returns but often fall short of beating retail inflation. Corporate bonds, in comparison, exhibit a lower risk profile when contrasted with the equity market, and they offer predetermined returns that surpass those of FDs.
Wint Wealth meticulously selects senior secured bonds offering fixed annual returns of 9-11%, with a maturity period ranging from 1 to 3 years. Our current bond offerings include Protium Finance ARP’23 (with a 10.25% XIRR) and InCred Feb’23 (with a 10% XIRR). New bonds are consistently introduced, and our assets typically sell out within 1-2 days. We prioritize the safety of investments by conducting thorough due diligence that extends beyond traditional credit ratings. To date, Wint Wealth has facilitated over 45,000 investors in allocating funds to corporate bonds totaling nearly Rs 1000 crore.
“BT: What advantages do bonds offer over investing in short-term mutual funds or taking advantage of the high FD rates offered by Small Finance Banks?”
AK: Non-senior citizens opting for a 3-5 year fixed deposit in small finance banks can enjoy an average annual return of 8-9%. Corporate bonds, offering interest rates exceeding 10% annually, present an attractive option, rewarding investors for assuming a risk premium.
In the recent Union Budget, the indexation benefits on debt mutual funds held beyond three years were eliminated. Consequently, investors no longer have an additional tax advantage to favor these mutual funds over corporate bonds. Debt mutual funds further limit choices in underlying bonds and anticipated returns. These funds predominantly allocate investments to Government securities (G-Secs), AAA, and AA-rated bonds, adhering to sectoral exposure limits. This restriction prevents investors from accessing high-interest-yielding bonds. Additionally, holding a corporate bond until maturity ensures predetermined returns, unlike debt mutual funds where returns can vary significantly due to fluctuations in interest rates, defaults, and macro-environmental factors. Fund managers’ buying and selling decisions influenced by these factors can impact investor returns.
BT: A surge of bond platforms has emerged lately. What’s driving this trend, and how can one determine the most suitable platform?
AK: The industry is experiencing a boost due to three key factors: 1) the increasing embrace of technology by DIY investors, 2) appealing interest rates on fixed-income instruments, and 3) forward-looking regulations from the Securities and Exchange Board of India (SEBI) that enhance investor confidence. Wint Wealth stands out by meticulously curating senior secured bonds and dedicating efforts to enlighten investors about inherent risks. We firmly assert that unsecured bonds are unsuitable for retail and HNI investors, given their lack of expertise in evaluating such risks. Consequently, we refrain from offering such bonds through our platform.
BT: Does the purchase of bonds from your exchange differ in price from buying directly through the stock exchange?
AK: Essentially, there is no price distinction for identical bonds whether acquired through our platform or directly on the exchanges. However, the bonds we offer may not be as readily available on the exchanges due to limited issue size and liquidity. Additionally, the stock exchanges don’t implement extra measures for selection and risk assessment. Hence, retail and HNI investors opting for exchange purchases might lack the expertise to choose and assess suitable bonds for themselves.
BT: The RBI retail platform also enables bond transactions for retail investors. How does it differ from your services?
AK: The RBI retail direct platform specifically facilitates the buying and selling of sovereign-backed G-Secs. While these bonds are the safest and most liquid, their yields are considerably lower than bank FDs. In contrast, we specialize in corporate bonds that offer interest rates ranging from 9-11% per annum, accompanied by measured risks. The minimum investment for G-Secs is Rs 10,000, while privately placed and listed bonds require minimum investments of Rs 1 lakh and Rs 1,000, respectively.