Just ₹10,000 gets you into bonds. Here's what else you need

But investors generally assess corporate bonds by first screening for a minimum credit rating and then picking the bonds with the highest yield within that rating category. What they miss is that while rating is an important factor to consider, it does not solve for default, market, and liquidity risks. We spoke to experts to understand what to look for beyond a bond’s rating.

According to Nishchay Nath, founder and chief executive officer, BondScanner, “A credit rating should be treated as the basic homework which every investor must do, taking it as the starting point and not the whole answer. Most people assume that a AAA credit rating means safe, and anything below should be avoided. But a rating is an opinion on one question: the likelihood that the issuer will pay the investor back on time.”

In the past, various instances have shown that credit ratings are not entirely bulletproof, as updates frequently lag real-time market movements, leaving investors exposed to sudden defaults.

An August 2025 National Institute of Securities Market (NISM) blog by Suresh Narayan, visiting faculty at NISM and founding partner and director, ARKS Consultants, highlighted that Indian credit rating agencies have faced manifold challenges due to their reactive approach, lack of transparency on methodologies, assumptions, and stress scenarios and as they rely on periodic financial disclosures and management interaction, rather than ongoing market intelligence or alternative data. “Several high-profile defaults over the last decade, from IL&FS to DHFL have made these shortcomings increasingly untenable,” he added.

Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap, said that rather than looking at the rating in isolation, investors should also consider its history, how consistent it has been, and whether it has been improving or deteriorating. “If it is rated by more than one agency, always consider the lowest of the ratings and find out their rationale,” he added.

Checklist

1. Check rating history, not just the current grade
2. Use the lowest rating if multiple agencies rate it
3. Read the rating rationale and outlook
4. Check if the bond is secured or unsecured
5. Assess the issuer's sector and track record
6. Look at the ownership structure
7. Check whether cash flows can service debt in a bad year
8. Weigh liquidity and price risk

Nath said that a rating alone does not indicate price risk, liquidity, how easily an investor can sell the bond, or the company's financial health. “What matters just as much is the detail behind the grade: the rating rationale, the outlook, whether the bond is secured, and whether the issuer's cash flows can service the debt through a bad year, not just a good one,” he added.

Beyond credit rating

Government bonds are considered safer than even AAA-rated corporate bonds because they are obligations of the sovereign, whereas corporate bonds carry the credit risk of the issuing company.

Srinivasan says a bond below the AA rating can be less risky if it is secured or backed by specific physical or financial assets owned by the issuing company. If the company goes bankrupt or cannot pay its debts, bondholders have the legal right to seize and sell specific assets to recover their money.

Yet there are unsecured bonds issued by public sector undertakings (PSUs) such as PFC and REC that are considered relatively low risk, even without specific assets pledged as collateral, he said. This is because the government holds a majority stake, providing implicit sovereign backing. An assessment of the issuer's sector is equally important, as is ensuring that the company is not new and has consistently been profitable.

While interest income from both bonds and FDs is taxed identically at the individual’s income slab rate, bonds differ because they can also attract capital gains tax when sold in the secondary market. For listed bonds, a long-term capital gains (LTCG) tax of 12.5% applies if sold after 12 months; if held for 12 months or less, the capital gain is taxed at the income tax slab rate.

Ultimately, a rating is only an informed external opinion on the financial health and credit risk of a bond issuer or a specific debt security and not a recommendation. To maximise safety and enjoy the benefits of periodic coupon payments, investors must look beyond simple credit ratings and focus on structural safety nets such as asset backing and sovereign support.