Corporate vs government bonds. Which one to choose for better investment?

In 2024, 33 bonds defaulted- 28 were corporate bonds, 4 public-private bonds, and only 1 was a government bond

Investing in bonds is a popular choice among investors seeking fixed-income opportunities. Among the various options available, government bonds and corporate bonds stand out as two primary categories. Each type of bond offers distinct advantages and disadvantages, making the choice between them dependent on individual investment goals and risk tolerance.

 

What are government bonds 

Government bonds are financial instruments issued by the government to secure funds from the domestic market. These bonds are regulated by the Reserve Bank of India (RBI), which acts on behalf of the government to issue and auction them to investors. The funds raised are typically allocated to public welfare projects and infrastructure development. Investors in government bonds receive a steady, fixed interest rate, and on maturity, they are repaid the bond's principal value.

 

 

“In 2024, 33 bonds defaulted— 28 were corporate bonds, 4 were public-private bonds, and only 1 was a government bond. Investing Rs 1 crore in a corporate bond with a 10–11 per cent YTM may lock in funds and create liquidity issues. Alternatively, government bonds offer stability but lower returns and less tax efficiency when compared to target mutual funds, said Chirag Muni, executive director, Anand Rathi Wealth Limited.

 

What are corporate bonds 

Corporate bonds are debt securities issued by companies to raise capital. When a company issues these bonds, it borrows money from investors in exchange for periodic interest payments, which can be fixed or variable. These payments continue until the bond matures at which point the company repays the original investment amount to the bondholder.

 

“Corporate bonds offer higher yields to compensate for credit risk, which varies with the issuer’s financial health and ratings. While less liquid, a diversified basket of corporate bonds can enhance returns and hedge inflation risks, appealing to those with a higher risk appetite. Yield spreads and credit ratings are critical indicators of the risk-return profile, especially during economic uncertainty,” said Rahul Bhutoria, director and founder, Valtrust.

 

“The best investment depends on your financial objectives and time horizon. For those seeking guaranteed safety, government bonds are a solid choice. For those willing to take on calculated risk for enhanced returns, high-rated corporate bonds are a strong alternative. Diversifying across both can help balance risk and reward,” said Shruti Aggarwal, co-founder at Stashfin.

 

Factors influencing bond selection 

Risk appetite: Conservative investors might prefer government bonds, while those with higher risk tolerance could explore corporate bonds.

 

Economic indicators: Current inflation rates, RBI's monetary policy, and overall economic growth significantly impact bond performance.

 

Credit ratings: For corporate bonds, investors must carefully analyse credit ratings from agencies like CRISIL and CARE.