These bonds are mostly offered by non-bank finance companies (NBFCs), small finance banks, fintech companies and microfinance lenders among others. Their tenure is mostly one to five years and are available on online platforms such as Indiabonds, BondsIndia, GoldenPi, Wint Wealth, Bonds Kart, Grip Invest and Leaf Round.
For now, these products are trending among traditional yield-chasers. These bonds yield about 300-500 basis higher than conventional products, like bank deposits and postal savings. The trigger for their growing popularity among individuals in the highest tax bracket has been the recent changes in the taxation of debt mutual funds. In an unexpected move, the government said from April 1 capital gains arising from investments made in debt mutual fund schemes would be added to taxable income and taxed in line with the income tax slab rate. As a result, the indexation benefit in debt mutual funds that lowered the tax outgo for investments held for more than three years went.
In the absence of tax benefits in debt MFs, investors are chasing returns from other riskier fixed income products.
A two-year bank deposit with SBI or the Post Office, earns 7%, while a Navi Finserv NCD maturing in October 2025 yields 10.8%. NCDs of Fincare Small Finance Bank maturing in February 2029 yield 11.45%.
Financial planners typically believe investors should use a core and satellite approach to investing in fixed income. The core portion of about 75-80% could be in higher rated bonds, sovereign bonds or government securities, while the satellite portion could be in higher risk bonds.
“An allocation of 20-25% towards high-yield bonds is reasonable,” said Vishal Goenka, co-founder of IndiaBonds.com. Goenka believes it is of utmost importance to exercise due diligence.
Distributors said though these platforms allow trading of these bonds, liquidity tends to be low and is non-existent in many cases.
“Delving into high-yield bonds demands meticulous evaluation of both bond issuer and bond parameters,” said Abhijit Roy, chief executive officer, GoldenPi. Roy believes investors could look at the issuer’s year-on-year revenue growth, whether the company maintains profitability post-settling interest expenses on debt raised via bonds and see if companies have a clean track record devoid of defaults or payment delays in prior bond tranches.
