India’s New Obsession With High-Yield Bonds: A Profitable Frontier or a Dangerous Detour?

Image taken from markets.com

A growing desire for better returns is pushing India’s retail investors into a space once dominated exclusively by seasoned institutions: high-yield bonds. What looks like a fast track to higher income often hides a complicated emotional journey, one shaped by the powerful pull of greed and the quiet pressure of fear. In the latest episode of Mint Bond Street Dialogues, presented by IndiaBonds, the company’s chief executive Vishal Goenka explored how these two emotions frequently determine whether investors succeed—or stumble—in this market.

Goenka explained that retail investors often swing between extremes. In his words, people either panic prematurely or become overly ambitious, allowing the hope of double-digit returns to overshadow basic prudence. The fear of losing out is quickly forgotten until markets remind them otherwise.

What tends to cause the deepest trouble, he said, is the tendency to build portfolios filled exclusively with high-yield instruments. Many investors disregard the most fundamental principle of wealth management: spreading risk. When greed sets the tone, asset allocation becomes an afterthought, setting the stage for potentially serious losses.

In the conversation, Goenka offered a simple way to understand the asset class. High-yield bonds are essentially debt instruments that promise returns higher than standard offerings, and they are usually issued by companies operating with moderate credit ratings in the A, A-minus or BBB-plus range. These firms are often still strengthening their balance sheets or are in the midst of an expansion phase, which means they must offer more attractive returns to compensate for higher risk.

The appetite for these bonds is fueled by dissatisfaction with traditional income products. Fixed deposits still hover around six percent, while secure public-sector bonds provide only slightly better rates. For investors eyeing ten to twelve percent returns, the trade-off is unavoidable: they must venture into lower-rated territory where the risks are far more pronounced.

Companies, meanwhile, rely on these instruments to broaden their borrowing options beyond banks. Doing so allows them to negotiate more favorable terms and strengthen their capital base, a process that ultimately helps fuel economic activity.

Despite the size of India’s bond market—an ecosystem valued at roughly $2.8 trillion—retail participation remains limited. Goenka emphasized that awareness is crucial, particularly for those exploring high-yield securities. Regulatory changes introduced by SEBI in 2022 have improved transparency within Online Bond Platforms, making it easier for investors to access detailed documents such as Information Memorandums and rating analyses. These disclosures allow buyers to assess the health of issuers before committing their money.

Goenka urged investors to resist the temptation of unusually high returns without understanding the underlying risks. No investment is completely safe other than government bonds, he said. In every other case, the possibility of default—however small—is always part of the equation.

Another essential layer, he noted, lies in the covenants embedded within the bond agreement. While ratings offer a preliminary indication of risk, covenants serve as the real guardrails protecting investors. Key clauses include mechanisms that activate when a company’s rating is downgraded, thresholds for non-performing assets in the case of NBFCs and limits on leverage through debt-to-equity caps. Strong covenants, he added, can often matter as much as the return being offered.

Goenka warned that one of the most common mistakes among newcomers is allowing high-yield instruments to dominate their portfolio. A balanced strategy, he said, should not allocate more than a quarter of one’s bond exposure to this category. The rest should be supported by safer, well-rated issuers that offer comfortable yields in the eight to nine percent range.

He also raised concern about the increasing circulation of unlisted and unrated bonds. These instruments, he stressed, operate outside SEBI’s regulatory ambit, leaving investors with limited information and virtually no safeguards. His advice was unequivocal: retail participants should stick to listed, rated securities available through registered Online Bond Platforms.

Liquidity continues to be one of the trickiest aspects of the high-yield universe. Although bonds have historically been treated as hold-to-maturity investments, liquidity tends to reflect the issuer’s rating cycle. Claims of guaranteed buybacks, Goenka cautioned, should be treated with skepticism because they invariably depend on market conditions.

There is, however, optimism on the horizon. Goenka revealed that India’s financial architecture is evolving, with upcoming initiatives from depositories that will make selling a bond nearly as seamless as purchasing one. While liquidity remains a challenge today, he said the ecosystem is actively building the infrastructure required to address it.