In 2025, most banks reduced the interest rates on their fixed deposits by 100 to 150 basis points. At the peak of the current interest rate cycle, most big banks were paying an interest rate of 7.25% to 8.00% per annum on fixed deposits with a tenure of 1-3 years. Currently, the banks are paying 6.00% to 6.75% per annum on fixed deposits of the same tenure. At the same time, most corporate bonds are paying interest rates in the range of 7.00% to 10.00% per annum on tenures of 1-3 years. However, the higher interest rate may come at a higher risk. So, what are the things an investor must check at the time of investing in bonds? Let us discuss.
Some of the things that you must check at the time of investing in bonds include the following.
1. Credit rating: In India, bonds are rated by SEBI-registered credit rating agencies such as CRISIL, ICRA, CARE, among others. The credit rating indicates the degree of safety regarding the timely servicing of financial obligations and the credit risk involved. For example, CRISIL’s credit rating scale is as follows.
The above table shows, the higher the credit rating, the higher the degree of safety and the lower the credit risk. The bonds with the highest credit rating usually pay the lowest interest rate. As the credit rating moves lower, the bond pays a higher interest rate to compensate investors for taking on a higher risk.
When selecting a bond for investment, the investor must factor in the credit rating and match it with their risk profile. An investor with a conservative risk profile should consider a bond with the highest credit rating. As principal protection is important for such investors, they have to be content with a lower interest rate. On the other hand, an investor with an aggressive risk profile may consider bonds with a lower credit rating. These investors get a higher interest rate for bearing a higher degree of risk.
2. Bond tenure: When selecting a bond for investment consider bonds with a tenure that matches the tenure of your financial goals. For example, if your financial goal is five years away, you must consider bonds with a tenure of five years or lower, so that the money is available when required. Based on financial goal tenure, the bonds for investment can be selected as follows.
- Short-term financial goals: These include goals with a tenure of up to three years. For example, building and maintaining an emergency fund, saving money for a gadget/consumer durable, buying a two-wheeler, accumulating money for a domestic vacation with family, paying high-cost debt, etc.
- Medium-term financial goals: These include goals with a tenure of 3-7 years. For example, buying a car, accumulating money for a house purchase down payment, accumulating money for an international vacation with family, accumulating money for starting a business, etc.
- Long-term financial goals: These include goals with a tenure of more than seven years. For example, accumulating money for a child’s higher education and marriage, accumulating money for retirement, home loan repayment, etc.
2. Coupon rate and payment frequency: The coupon rate is the annual interest rate that a bond pays to its holder. It is expressed as a percentage of the bond’s face value. For example, if a bond has a face value of ₹100 and the coupon rate is 7%, the annual interest amount paid will be ₹7.
When selecting a bond, check the coupon rate to ensure it matches your return expectations. Also, check the interest payment frequency. If you are looking for a regular cash flow, check for bonds that pay interest monthly or quarterly. To benefit from long-term compounding, check for bonds that pay the entire interest amount on maturity.
When you buy a bond from the secondary market, check the bond yield, which considers the price at which the bond has been bought. When a bond is bought at a premium or discount to the face value, the yield will differ from the coupon rate.
3. Liquidity: Check whether the bond will be listed on the stock exchanges, ensuring it can be bought and sold through the secondary market. When liquidity is high, the bond can be easily sold without loss in value. When liquidity is low, the seller may find it difficult to find a buyer. Even if a buyer is found, the price offered may be lower than expected.
During times of financial emergency, liquidity comes in handy when you have to sell the bond before its maturity.
4. Security: A secured bond is backed by a charge on the company’s assets. If the issuer defaults, the assets can be taken over and sold to pay back the investors. It is generally better to invest in a secured bond over an unsecured bond. The security acts as a financial backup for investors in the event of a default. However, secured bonds pay a lower interest rate than unsecured bonds. Government bonds don’t have any security in the form of a charge on assets. However, they are backed by a sovereign guarantee.
Bond investing checklist
While investing in a bond, you need to check several factors. Some of those important factors include assessing the credit rating, aligning the bond tenure with financial goal timelines, matching the bond return with your return expectations, checking the liquidity, and verifying whether there is a backup in the form of security, etc. A good financial advisor can help you with these checks and others, thus helping you make an informed decision.