Corporate & fixed income

What actually drives a fixed income return

Fixed income is widely treated as the boring, safe part of a portfolio, and that framing causes more disappointment than any other assumption in Indian investing. Debt instruments are not uniformly safe, they do not all behave alike, and some of them move more than people expect.

A fixed income return has two components, and understanding the difference explains almost everything.

Accrual is the interest the underlying instruments pay. It builds steadily and is the predictable part.

Price change is what happens to the market value of those instruments when interest rates move or when the market's view of the borrower's creditworthiness changes. Bond prices move inversely to rates: when yields rise, existing bonds paying lower coupons are worth less, and vice versa.

How much of each you get depends on what you hold. A very short-dated instrument is almost all accrual. A long-dated one carries substantial price sensitivity. This is why two funds both described as “debt” can behave completely differently in the same month.

We do not publish expected or indicative returns on this page. Any figure of that kind would be a projection rather than a fact, and would age badly the moment rates or spreads moved.

The debt fund categories, and what they are for

SEBI's categorisation framework gives each debt scheme a defined mandate, which makes comparison far easier than it used to be. Broadly:

• Overnight and liquid — very short maturities, minimal price sensitivity. Used for parking money that may be needed shortly, and as the source fund for an STP.
• Ultra-short, low duration and money market — slightly longer, slightly more sensitive, for horizons of a few months to a year.
• Short and medium duration — for horizons of one to three or four years, accepting some price movement.
• Corporate bond — mandated to hold predominantly in the highest credit rating categories. Credit risk is deliberately constrained.
• Credit risk — mandated to hold predominantly below the top rating categories. Higher yield, materially higher credit risk. The name is an accurate description, not a warning label to be ignored.
• Banking and PSU — restricted to paper issued by banks, public sector undertakings and public financial institutions.
• Gilt — government securities only. No credit risk, full interest rate risk, and capable of meaningful volatility.
• Dynamic bond — the manager varies duration according to their rate view. You are buying a judgement call.

The practical rule is to match the category's typical horizon to your own. Most bad debt fund experiences come from holding something longer-dated than the money's actual timeline, and then needing to exit during a rate move.

Corporate deposits, NCDs and bonds

Outside mutual funds, fixed income is also available directly.

Corporate fixed deposits are unsecured borrowings from a company. They typically offer more than a bank deposit, and the reason is straightforward: they are not bank deposits. There is no deposit insurance, and repayment depends entirely on the company. The credit rating is the single most important thing to look at, and a high rate from a weak issuer is not an opportunity.

Non-convertible debentures are tradeable debt instruments issued by companies, secured or unsecured. Listed NCDs can in principle be sold before maturity, though liquidity in the secondary market varies considerably and a thinly traded NCD may be difficult to exit at a fair price.

Government securities can now be bought directly by retail investors through the RBI's Retail Direct platform, alongside treasury bills and state development loans. No credit risk, and full exposure to rate movements if sold before maturity.

Against these sit bank fixed deposits, which carry deposit insurance up to the prescribed limit per depositor per bank and are the simplest instrument available. Their drawback is taxation and, over long periods, the erosion of real value by inflation.

The risks people underestimate

Credit risk is real and has materialised in India. Defaults and downgrades at large, well-regarded issuers have inflicted genuine losses on debt fund investors and deposit holders in living memory, and a wind-up of several debt schemes in 2020 left investors unable to access their money for an extended period. None of that makes debt investing unwise; it makes the phrase “safe as a debt fund” misleading.

Liquidity risk compounds credit risk. Problems arrive together: the moment a credit is questioned, the market for it thins, and the price at which it can actually be sold falls further than the downgrade alone implies.

Interest rate risk is not a credit issue at all. A gilt fund holding only government paper can still fall in value when yields rise. Sovereign backing guarantees repayment at maturity, not stability along the way.

Concentration. Check what proportion of a scheme sits in any single issuer or group, particularly in higher-yielding categories.

Taxation

The tax treatment of debt-oriented mutual funds in India changed with the Finance Act 2023 and was amended again in 2024. Under the framework for specified mutual funds, gains are taxed at the investor's applicable slab rate without indexation, and the definition of which schemes fall within that category has itself been revised. Interest on fixed deposits and corporate deposits is taxable at slab rates with tax deducted at source above the prescribed thresholds.

Because this area has moved more than once in a short period, treat any specific figure in an article, including this one, as needing verification. Confirm the current position for your instrument, holding period and tax bracket with your chartered accountant before deciding between options on tax grounds.

How Rytvae helps

We match instruments to when the money is actually needed rather than to a yield table, look at credit quality and concentration before anything else, and say plainly where a bank deposit is the better answer. As an AMFI-registered distributor we are paid trail commission by the AMC on mutual fund holdings; you pay us nothing directly. See also goal-based investing and portfolio review.

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