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Read ArticleBonds, NCDs and fixed deposits: understanding credit risk
Fixed income is not risk-free. How credit risk works across bank deposits, company FDs, bonds and NCDs, and how to read a credit rating sensibly.
Fixed income investments promise a set return, which makes them feel safe. But a promise is only as good as the borrower making it. Credit risk, the possibility that the issuer delays or fails to pay interest or principal, is the risk that matters most in fixed income, and it varies widely between products.
Where common products sit
- Government securities issued by the central government carry the lowest credit risk in rupee terms.
- Bank fixed deposits are covered by DICGC insurance up to ₹5 lakh per depositor per bank, across principal and interest. Amounts above that depend on the bank’s strength.
- Corporate fixed deposits are not covered by deposit insurance. Their safety depends entirely on the company.
- Corporate bonds and NCDs range from very high quality to speculative. The credit rating and the issuer’s finances matter more than the headline yield.
Reading a credit rating
Credit rating agencies registered with SEBI, such as CRISIL, ICRA and CARE, assess an issuer’s ability to repay. AAA is the highest rating on the long-term scale, followed by AA, A and BBB, which is the lowest investment-grade category. A rating is an informed opinion at a point in time, not a guarantee, and ratings can be downgraded, sometimes quickly.
Is the extra yield worth it?
A higher interest rate is the market’s payment for higher risk. Before choosing a higher-yielding bond or deposit, ask:
- Why is this issuer paying more than others with a similar rating?
- What happens to my capital if the issuer defaults? Is the instrument secured or unsecured?
- Can I sell before maturity, and at what price? Many bonds trade thinly.
- How much of my fixed income would this one issuer represent?
Other risks to keep in mind
- Interest rate risk: when rates rise, the market value of existing bonds falls, which matters if you sell before maturity.
- Liquidity risk: you may not find a buyer quickly.
- Tax: interest is generally taxed at your slab rate, which can reduce the after-tax return considerably.
A well-built fixed income allocation spreads money across issuers and maturities, keeps lower-rated holdings to a modest share, and matches maturities to when the money will be needed. Safety in fixed income comes from diversification and discipline, not from a single high-yield product.
