India’s is an ocean that is almost ₹3 trillion in depth. But, within that vast financial ocean, there is a specific asset class that experts feel is attractive for investment at this point in time – .
A combination of economic and fiscal cues makes this asset class a lucrative investment, experts say.
“We continue to remain positive on 2-3 year corporate bonds as this segment continues to offer favourable spreads of 80-85 bps (basis point, 1 basis point is one hundredth of a percentage point) over similar maturity Government securities (G-Sec). This, we believe, is the sweet spot on the corporate yield curve,” says Shriram Ramanathan, CIO, Fixed-Income, HSBC Mutual Fund.
Thomas Stephen, Director & Head – Preferred, Anand Rathi Share and Stock Brokers, agrees that bonds with 2–4 year maturities are looking quite attractive at the moment due to elevated spreads over government securities.
What this means is that for the same tenure within the next 2–4 years, investors are better off allocating to corporate bonds, as the higher spreads adequately compensate for the additional credit risk relative to .
As of the end of September, the spread of 3-year AAA-rated corporate bonds over government securities stood at around 1%, meaning such corporate bonds were yielding approximately 1% higher than comparable government bonds.
Similarly, the spread for 5-year AAA-rated papers was about 80 basis points, according to experts on why the moderate-term corporate bonds are attractive at current yields.
What makes current corporate bond issues attractive?
With the recently announcing a 25-basis-point rate cut, global monetary conditions are becoming more accommodative. In India, controlled inflation and improving liquidity could give the RBI room to consider a 25 bps rate cut in the upcoming .
Against this backdrop, current yields on investment-grade corporate bonds are higher, making them particularly appealing for investors with short- to medium-term horizons. Remember that bond yields and prices move in opposite directions.
The combination of attractive spreads and the potential for future rate easing makes this segment a strong contender for investors seeking both steady accrual and possible capital gains.
The RBI has largely been on an accommodative stance when it comes to interest rates in the recent past. With interest rates cut by 50 bps and with growing expectations of possible further cuts soon, it is possible that fresh issuance of corporate bonds will also see lower coupon rates, largely in line with existing interest rate cut trends.
This eventuality is further strengthened by the fact that the RBI intends to ensure liquidity surplus in the overall economy.
“Surplus leads to cheaper borrowing for corporates and individuals alike. This, in turn, nudges corporates to provide lower coupon rates when issuing fresh bonds,” explains Stephen.
The represents the annual interest payment as a percentage of the bond’s face value. Thus, there is a possibility that future issuances of bonds (in the moderate-term corporate bonds category) would not have the sort of coupon rates that one could get now.
“However, the corporate bonds’ coupon levels still reflect a premium over government securities, making this an attractive entry point for investors before yields decline further. The premium justifies the added risk that an investor takes over the sovereign issues,” says Saurav Agrawal, Co-founder of Jiraaf.
Corporate bond investment strategy
So, bonds (at least in the moderate-term corporate bond category) are an asset class that the investor can consider. But, how does the investor go about locking in such yields currently?
“Schemes like Short Duration Funds, Banking and PSU Debt Funds and the Corporate Bond Funds are largely positioned towards 2-4 year corporate bonds, which can benefit from easing liquidity and spread compression,” explains Ramanathan.
Investors can also look at the Low Duration category with some allocation to credits that can offer better returns over traditional 1-year products. “Retail investors can also take advantage of the Income Plus Arbitrage FoF category to capture tax-efficient returns if investment horizons are greater than 2 years – most of the offerings in this category are heavy towards corporate bonds,” says Ramanathan.
“There are multiple MF categories that the investor can consider to enter into this category,” explains Stephen.
Some of the categories that he lists include,
(1) Income + Arbitrage FoFs: This category aims for arbitrage++ returns by largely always having a blended portfolio of debt and arbitrage mutual funds (at least 65% in debt mutual funds at all times). With 12.5% taxation on capital gains post a 24-month holding period and most funds in this category sticking to the short-duration strategies, this category becomes a tax-efficient debt investment option.
(2) Short Duration Bond Funds: with a mandate to invest in bonds with a Macaulay Maturity of 1-3 years.
(3) Medium Duration Bond Funds: with a mandate to invest in bonds with Macaulay Maturity of 3-4 years.
What will affect corporate bonds in the near term?
“In the near term, we expect positive headwinds to corporate bond demand as investors would look to lock in attractive credit spreads and play out the spread compression story,” says Ramanathan.
As we would likely approach the end of the rate easing cycle by the end of FY2026, we could see incremental reallocation towards corporate bonds from government securities. At the same time, markets remain cautious on headwinds from the higher supply of state government securities for the rest of FY26 and would like to position in 2–4-year corporate bonds where state supply is lower or negligible.
Overall, the debt markets are also sensitive to global developments and will look for cues from a likely trade deal with the US and actions by the central banks, with a broad view leaning towards easing through the rest of FY26.
Liquidity and why it matters
RBI has maintained that it will ensure sufficient liquidity in the system to allow transmission of rate cuts.
“While, as of now, system liquidity is flat, with Government spending liquidity will turn positive. Additionally, the impact of the pending CRR cuts will be reflected over the course of this month, and the maturity of G-Sec in Nov 2025 and Jan 2026 will also add to liquidity,” says Ramanathan.
Given that liquidity is expected to remain in surplus for the near future and there is a possibility of further rate easing over the next few policies (as reiterated in the Oct MPC policy and the minutes published), experts believe corporate bond yields will soften and easing liquidity will provide an opportunity for spread compression in corporate bonds.
The Graph 2 (3-Year AAA PSU Spread vs Liquidity) shows the historical spread of 3-year corporate bonds along with system liquidity, indicating that there is room for spread compression as liquidity eases again into surplus territory.
(Manik Kumar Malakar is a freelance writer. He writes on bonds, the stock market and personal finance.)
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.