Recent market volatility has driven Indian investors toward fixed income instruments, particularly bonds, seeking stability and wealth preservation. However, despite bonds being considered a low-risk asset class, they carry inherent risks that every investor must understand.
Platform Safety and Regulatory Framework
Vishal Goenka, co-founder of IndiaBonds, emphasized during Mint's Bond Street Dialogues that regulatory oversight should be the primary concern for bond investors. He strongly advised investing only through SEBI-regulated platforms and purchasing exclusively listed bonds for additional security.
Listing provides crucial protection as it subjects debt instruments to SEBI oversight and requires issuing companies to maintain strict disclosure standards, including quarterly financial reporting. Goenka specifically warned retail investors against unlisted bonds, recommending them only for ultra-high-net-worth individuals with specialized knowledge.
Aligning Bonds with Financial Goals
One of the fundamental principles of bond investing involves matching instrument maturity and features with specific financial objectives. Goenka suggested investors carefully consider whether they're saving for education, home purchase, or other milestones when selecting bond tenures ranging from one to five years.
Investors can further customize their bond investments by selecting different interest payment frequencies—monthly, semi-annual, or annual—to align with their cash flow requirements, such as coordinating monthly interest payments with EMI obligations.
Credit Ratings and Risk Assessment
The conversation highlighted credit risk as a critical factor, with Goenka comparing company credit ratings to individual CIBIL scores. He explained the direct risk-return relationship: lower ratings bring higher potential returns but also increased risk.
For practical risk segmentation, he outlined current market opportunities: government bonds offering 6.5-7% risk-free returns, and the Double A (AA) segment providing 7-8.5%. He explicitly advised retail investors to avoid Triple B Minus (BBB-) and lower-rated bonds, reserving these for financial professionals due to their elevated risk profile.
While acknowledging that credit ratings aren't foolproof—referencing the 2008 Global Financial Crisis where highly-rated securities defaulted—Goenka noted significant improvements in India's regulatory environment post-2018-19, with tighter oversight of credit rating agencies and listing norms enhancing investor protection.
Portfolio Strategy and Risk Management
Goenka proposed a strategic fixed income allocation comprising 25-30% of the total investment portfolio. His recommended distribution includes: 20% in short-term deposits or liquid mutual funds for emergency needs, 20% in long-term Government Securities to potentially benefit from capital gains during lower interest rate cycles, no more than 25% in High Yield Corporate Bonds with 2-3 year maturities and thorough due diligence, and 35-40% in Double A (AA) Corporate Bonds for steady income.
He specifically cautioned against two high-risk approaches: Structured and Securitised Debt, which require sophisticated understanding unsuitable for most retail investors, and Concentration Risk, where investors overload portfolios with high-yield, risky bonds.
Goenka warned against schemes promising 10-11% returns, explaining that these often lead to dangerous portfolio concentrations in triple B rated papers. He emphasized that investors must not ignore risk simply because returns appear attractive at 15%, but should diligently review credit rating reports and company financials.
Safety Mechanisms and Final Advice
A significant safeguard in the bond market is the Debenture Trustee (DT), a SEBI-regulated entity appointed by issuers to protect bondholders' interests. Goenka described the DT as an investment guardian who monitors payments, tracks compliance with bond covenants, and activates during defaults to mobilize investors and initiate recovery processes.
Concluding his advice, Goenka highlighted diversification as the most crucial protection against volatility. He illustrated this with a powerful example: corporate bonds delivering 10% returns last year when Nifty returns were -2% created a 12% return differential, effectively offsetting equity market downturns.
He affirmed that bonds remain essential components of diversified financial portfolios but urged investors to move beyond low-return fixed deposits to secure their wealth through informed bond investment strategies.
