Understanding Corporate Bonds and NCDs
Corporate bonds are debt instruments issued by companies to raise capital. When you buy a corporate bond, you are essentially lending money to the company in exchange for periodic interest (coupon) payments and return of principal at maturity. Non-Convertible Debentures (NCDs) are a common form of corporate bond in India, issued by NBFCs, housing finance companies, and corporates. NCDs are rated by credit rating agencies (CRISIL, ICRA, CARE, India Ratings) on a scale from AAA (highest safety) to D (default). Higher-rated bonds offer lower yields but greater safety, while lower-rated bonds offer higher yields with increased credit risk.
Building a Fixed-Income Portfolio
A diversified fixed-income portfolio typically includes a mix of government securities for safety, AAA and AA-rated corporate bonds for steady income, and a smaller allocation to high-yield bonds for enhanced returns. Consider the yield curve when selecting maturities — in a falling interest rate environment, longer-duration bonds benefit from price appreciation, while rising rate environments favour short-duration instruments. Laddering your bond maturities (spreading investments across different maturity dates) reduces reinvestment risk and provides regular cash flows. Corporate Fixed Deposits from highly-rated companies and NBFCs can complement your bond portfolio with simplicity and predictable returns.
Credit Funds and Professional Management
For investors who prefer professional management, credit funds (structured as AIFs or debt mutual funds) invest in a diversified portfolio of corporate bonds and credit instruments. Debt AIFs can access opportunities unavailable to retail investors — including unlisted NCDs, bilateral loans, mezzanine financing, and structured credit deals. The fund manager performs detailed credit analysis, monitors covenants, and manages concentration risk across issuers and sectors. Yields on credit funds typically range from 10 to 14 percent depending on the credit quality and maturity profile. Key risks include credit default, liquidity constraints, and interest rate movements. Always review the fund portfolio quality, SEBI compliance, and the manager credit underwriting track record before investing.