Tipping Point: What risks do investors face in corporate bonds?

The paper also warns that the share of risky bonds could rise from 18 per cent to 27 per cent if rates on corporate bonds were to rise by 2 percentage points

One major risk is default risk. A recent report from Mckinsey Global Institute says that around 18 per cent of outstanding corporate bonds in India, or nearly one in five, were at the risk of defaulting in 2016. The paper also warns that the share of risky bonds could rise from 18 per cent to 27 per cent if rates on corporate bonds were to rise by 200 basis points (or 2 percentage points).

What are the implications for investors? 

In recent times, a number of players have come out with non-convertible debentures (NCDs) offering interest rates of 9 per cent or above. Experts say that you should not invest in papers with a credit rating below AA+. More conservative investors should, in fact, not invest in papers having a credit rating below AAA, since credit ratings in India can fall by several notches at one go.