Risk-to-reward. Should you invest in corporate bonds offered on Grip platform?  

Fintech start-up ‘Grip’, which curates non-market-linked alternative opportunities, is now offering listed investment-grade corporate bonds on its platform. It has added these products as part of its tie-up with Oxyzo, which offers credit solutions to SMEs. The new product offering sold on Grip platform can be bought for as low as Rs 10,000. Should you take a bite? In this article, we will delve into the pros and cons.  

Corporate bonds as investments 

New investors will likely see the term YTM being used regularly for corporate bonds. Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures.  

Through Grip’s platform, individual investors will be able to discover corporate bonds that are rated, ‘A’ or above by credit rating agencies such as CRISIL, ICRA, and India Ratings (Fitch). Ratings are a reflection of the bond issuer’s credit quality assessment by the agency. 

Corporate bonds being marketed will be held in demat form and listed on the stock exchanges to enable secondary trading, should the investor need to exit before maturity.  

Below is a table that shows you the current yields offered by corporate bonds belonging to different ratings.  

The corporate bonds you buy on Grip are sourced from Oxyzo Financial Services, which had subscribed to the bonds during the primary issuance and will now be selling these bonds directly to you.  

How to invest 

If you login to the Grip platform, you will get to check out various asset classes available for investing and the existing investment options. At present, there are two corporate bond offers: Five Star Business Finance (ICRA A+ rating) and Navi Finserv (Fitch A1 rating). They have monthly interest payment and the time-to-maturity is 13-16 months. 

As mentioned in our previous review of Grip offerings, the platform does a neat job in terms of presenting the relevant information at one place.

For instance, if you click on the specific investment option, it will take you to a separate page. On that page, there is info about asset details, minimum investment, face value of bond (non-convertible debenture), pre-tax YTM (%), date of issue, date of bond maturity, transaction type (secondary in most cases), stock exchange where bond is listed, and instrument type. This apart, there are details about the issuer, financials, disclosures and risks. Grip provides documents such as bond issue memo, corporate presentation, annual report and rating rationale. 

If you are interested in investing, there is mention of purchase price per unit (in rupees), pre-set options of amount of unit purchases, amount payable now (inclusive of stamp duty) and pre-tax returns amount (interest plus maturity amount).  

Note corporate bonds are available for users having demat accounts (either NSDL or CDSL). Your investment process begins as soon as you furnish details such as PAN, address proof, cancelled cheques, etc. 

Our take 

Many investors tend to think corporate bonds are an avenue to generate attractive returns as these are secured and rated financial instruments, listed on the stock exchanges. While this may be true for some bonds, generalising this will be a costly mistake. Why? One can look at developments in the mutual funds space in recent years to understand what happens when bond issuers face difficulty. Ratings of corporate bonds can be downgraded and this can result in losses as the price of the bond falls in such a scenario. 

With increasing interest rates and inflation, AA-/A+ rated corporate bonds offer 500-600 basis points higher annual returns than 6-6.5 per cent p.a. offered by bank fixed deposits (they offer deposit insurance and are almost fail-safe). The extra returns on corporate bonds and that, too, the lower rated ones, come because you as an investor are expected to stomach the additional risk too.  

If you are a new investor to bonds, do not venture into the world of AA-/A+ rated bonds directly. Use the mutual fund route where a trained and experienced fund manager builds a portfolio with different bonds. AAA rated corporate bonds should be your first port of call, before you go up the higher risk matrix.  

While Grip has done a great job of marketing bonds on their platform, prospective investors must take of a few key things about these AA-/A+ corporate bonds.  

One, while these are listed bonds (can be sold on exchange), do check the liquidity aspect because typically it is low. Grip says it could also help identify buyers on a best-effort basis, so it is not a guarantee. When you want to exit by offloading a bond in the secondary market, you will have to sell at the market price (market price may vary from par-value).  

Two, AA-/A+-rated bonds are high-yield but they also are quite risky. Recall the Franklin Templeton MF debt fund saga. Typically, such companies are young and are susceptible to more problems. So, take the ratings assigned to them with a pinch of salt.  

Three, corporate bond taxation should be understood properly for post-tax returns. The interest earned from the bonds is taxed as per marginal slab rate, and the maximum slab rate is 30 per cent. Appreciation of the bond price is considered as capital gain and taxed accordingly. If the bonds are held for the long-term (more than 12 months for listed bonds), the capital gain tax will be 10 per cent. Short-term capital gain tax can be 5 per cent to 30 per cent. 

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