Daijiworld Media Network- Mumbai

Mumbai, Jun 10: Traditional bank fixed deposits (FDs), once a go-to choice for risk-averse savers, appear to be losing their shine. With the Reserve Bank of India (RBI) reducing the repo rate by one percentage point since February, FD interest rates have followed suit—prompting retail investors to shift towards higher-yielding corporate bonds.

This strategic shift in investor sentiment is evident as more individuals opt for state-guaranteed securities, bonds from non-banking financial companies (NBFCs), and instruments offered by small finance and microfinance institutions. These alternatives are now delivering more attractive returns than standard FDs.

For instance, State Bank of India offers a maximum of 6.7% interest for FDs of 2-3 years. In contrast, state-backed bonds issued by governments such as Telangana, Kerala, Andhra Pradesh, and Uttar Pradesh for tenures of 2-4 years are yielding between 9-10%, a clear jump in returns.

According to a report by The Economic Times, SEBI-registered Online Bond Platform Providers (OBPPs) like Indiabonds, Bondbazaar, Grip Invest, and Wint Wealth are experiencing a notable spike in trading activity. One of these platforms reported a twofold surge in trading volumes this quarter compared to July-September 2024, while another observed a tenfold increase in new investor registrations over the previous year.

"Direct investments in bonds can typically offer an additional return of 3-5 percentage points over traditional fixed deposits," said Suresh Darak, founder of Bondbazaar, as quoted in the report.

Experts point out that several NBFCs and microfinance institutions, such as Muthoot Capital, MAS Financial, and Edelweiss Financial, are issuing bonds rated AA or lower, offering returns in the 10-12% range. However, financial advisors are urging investors to tread with caution.

"Two- to three-year bonds are ideal as they offer a good balance between attractive yields and manageable risk exposure," shared Vishal Goenka, co-founder of Indiabonds.com. He further explained that the short- to medium-end of the risk-free curve has steepened, making this duration especially lucrative for better risk-adjusted returns.

Wealth managers advocate diversification—spreading investments across multiple issuers, tenures, and credit ratings. “Don’t invest more than 10% in a single issuer. A 1-3 year spread helps manage reinvestment and interest rate risk,” Darak added.

Given the higher risks involved in corporate bonds compared to bank FDs, experts also stress the importance of due diligence—monitoring issuer performance, checking credit ratings, and ensuring a history of responsible management.

As FDs falter in the face of falling rates, corporate bonds have emerged as an appealing option for retail investors willing to explore new avenues for income—with careful diversification and prudent risk management at the core.