Retail investors shift focus to high-yield corporate bonds for better returns

Synopsis

Mumbai's retail investors seek higher returns. They are investing in high-yield corporate bonds. RBI's rate cuts push them towards state-guaranteed papers and NBFC bonds. Online platforms like Indiabonds see increased activity. These bonds offer better returns than fixed deposits. Experts advise diversification across issuers and tenures. Investors should monitor company financials for risk management.

Mumbai: Mumbai: Retail investors on the lookout for higher returns from their fixed-income portfolios are turning towards high-yielding corporate bonds. This has gathered pace after the Reserve Bank of India (RBI) cut repo rates by as much as a percentage point since February, which is forcing bank deposit rates lower.

They are eyeing state-guaranteed papers, NBFC bonds and small finance and microfinance bonds, which give higher returns than bank deposits. These bonds are available through many retail websites where investors can buy them for as little as ₹10,000. These are Online Bond Platform providers (OBPP), SEBI registered platforms that facilitate buying and selling bonds online.

Investors are using platforms like Indiabonds, Bondbazaar, Grip Invest and Wint Wealth among others to buy these bonds, with volumes growing on these platforms. Traded volumes on one of the platforms doubled this ongoing quarter compared with July-September 2024 quarter. At another, there is 10-fold growth in signups now compared with a year earlier.

Agencies

"Direct investments in bonds can typically offer an additional return of 3-5 percentage points over traditional fixed deposits," said Bondbazaar founder Suresh Darak. While a fixed deposit from State Bank of India can offer a maximum of 6.7% for a deposit with a tenure of 2-3 years, state-guaranteed bonds from Telangana, Uttar Pradesh, Kerala and Andhra Pradesh with a tenure of 2-4 years could offer yields of 9-10%.

In addition, some NBFCs and MFI bonds rated AA or lower are available from Muthoot Capital, MAS Financial, Edelweiss Financial and could potentially offer 10-12% returns.

Wealth managers believe investors should build a portfolio of these bonds, rather than putting all their money in a single bond, and opt for shorter tenures of 2-3 years.

"Investors may consider two-, three-year bonds, which balance yield potential with visibility on credit risk and interest rate movements," said Indiabonds.com cofounder Vishal Goenka. He believes the risk-free curve has steepened at the short to medium end with maturity of 2-3 years, making this segment attractive for those looking for better risk-adjusted returns without committing to long tenures.

"Diversify across issuers, tenures and ratings. Do not invest more than 10% in a single issuer, investing across one to three years helps manage reinvestment and interest rate risk and diversification ensures a risk-adjusted fixed-income portfolio," said Darak of Bondbazaar.

Wealth managers advise investors to keep a track of the financials of the company and the management's track record while buying high-yielding bonds, given that they carry higher risk. Investors should spread their risk by buying a small quantity of these bonds, they said.

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