In 2018, DHFL carried an AAA rating. Credit rating agencies — the same ones that grade bonds for retail investors — looked at DHFL's books and said: this is the safest category of borrower. Twelve months later, DHFL defaulted. Retail investors who had parked money in its bonds and NCDs spent the next five years watching legal proceedings, and eventually recovered around 38 paise on every rupee. People who had put the same money in an SBI FD got every paisa back, plus interest, without reading a single court filing.
That story is not an argument against corporate bonds. It's an argument for understanding exactly what you're buying before you buy it.
The 100–170 Basis Point Question
Right now, in FY26, an SBI fixed deposit for three years yields around 6.8%. A AAA-rated corporate bond from a large NBFC or manufacturing company yields somewhere between 7.5% and 8.5% for a similar tenure. That difference — 100 to 170 basis points — is not a gift from the market. It is your compensation for taking on credit risk that the FD simply doesn't carry.
On ₹10 lakh over three years, that spread translates to roughly ₹30,000–₹51,000 in extra interest. Sounds good. But the question you need to answer honestly is: what is the actual probability that the company doesn't pay you back, and what do you recover if it doesn't?
What AAA, AA, and A Actually Mean in Practice
Rating agencies like CRISIL, ICRA, and CARE assign ratings that are meant to signal default probability. Here's what the tiers roughly look like in the Indian bond market:
- AAA-rated bonds yield 7.5–8.5% for 3–5 year tenures. Historical default rates for this category in India are under 0.5% over a 3-year window — extremely low, but not zero, as DHFL and IL&FS proved.
- AA-rated bonds yield 8.5–9.5%. The default probability steps up meaningfully, and the pool of issuers is more varied. Some are genuinely solid; others are large companies with deteriorating balance sheets.
- A-rated bonds yield 9.5–11%+. You are now firmly in the territory where you need to read the prospectus, understand the sector, and have a view on the company's cash flows. Default rates in this category can be 2–4% over a 5-year period in stress scenarios.
The jump from AAA to AA might look like 100 extra basis points of yield. But the jump in actual risk is not linear. A-rated bonds are not just "a little riskier" than AAA — they can be structurally different instruments from a recovery standpoint.
The DICGC Guarantee Is Not a Small Detail
FDs up to ₹5 lakh per bank are insured by the Deposit Insurance and Credit Guarantee Corporation — DICGC, a subsidiary of RBI. This is a legal guarantee backed by the government. If your bank collapses tomorrow, ₹5 lakh comes back to you. Full stop.
Corporate bonds have no equivalent protection. None. When a company defaults, you join a queue of creditors. Secured bondholders come before unsecured ones. Banks and institutional creditors often have better security packages than retail investors. The IL&FS default in 2018 — again, a AAA-rated entity — is still being resolved in parts as of 2025. Some tranches of IL&FS debt have seen partial recovery, others are still tied up in NCLT proceedings.
So when you compare a 6.8% FD to an 8% corporate bond, you're not comparing two similar instruments with different interest rates. You're comparing an insured deposit to an unsecured loan you're making to a company.
When the Math Actually Favors Bonds
None of this means bonds are a bad idea. For the right investor, in the right situation, they're a completely legitimate allocation. Here's when the math starts to work:
- You have more than ₹5 lakh to deploy in fixed income. Below ₹5 lakh, the DICGC guarantee makes FDs almost impossible to beat on a risk-adjusted basis. Above ₹5 lakh, the calculus changes — your FD exposure above the insured limit is also technically unsecured credit risk, just at a lower yield.
- You're looking at large, listed PSU bonds or AAA-rated issuers with transparent financials. NHAI bonds, REC, PFC, NABARD — these are quasi-sovereign issuers where the actual default risk is close to negligible. The 60–80 bps pickup over FDs for these names is arguably low-risk income.
- You're in the 30% tax bracket and looking at tax-free bonds. Some infrastructure bonds issued by entities like NHAI and HUDCO carry tax exemption on interest. At a 30% marginal rate, a 6% tax-free bond beats a 7.8% taxable FD on post-tax returns.
- You understand that liquidity is limited. Corporate bonds on the BSE and NSE debt segment trade thinly. Selling before maturity often means eating a price hit. If you might need the money in 18 months, an FD's premature withdrawal penalty is usually cheaper than bond market illiquidity.
How to Actually Evaluate a Bond Before You Buy
The yield number is the last thing you should look at. Start here instead:
- Check the issuer's debt-to-equity ratio and interest coverage ratio. An interest coverage ratio below 2x means the company is already stretching to service existing debt. You'd be lending to a stretched borrower.
- Look at the security structure. Is the bond secured against specific assets? If yes, which ones, and what are they worth in a forced sale? Unsecured NCDs from mid-size NBFCs are a different animal from secured bonds backed by a real estate portfolio.
- Track rating trajectory, not just the current rating. CRISIL and ICRA publish rating watch and outlook updates. A AA-rated bond on "rating watch negative" is a red flag. The default hasn't happened yet, but the rating agencies are telling you something.
- Use platforms like Zerodha's GoldenPi integration, HDFC Securities bond desk, or SEBI's Bond Bourse to check live yields and liquidity depth before assuming you can exit easily.
- Diversify across issuers. Putting ₹10 lakh into a single AA-rated NBFC bond is a concentration bet, not a fixed income strategy. Spread across 4–5 issuers in different sectors if you're building a bond ladder.
The Real Trade-Off
The 100–170 basis point premium on AAA corporate bonds is probably fair compensation most of the time. Indian corporate default rates at the top rating tier have historically been low — the DHFL and IL&FS episodes were painful precisely because they were rare. But rare is not zero. And when defaults happen at scale, the recovery process in India through NCLT is slow, expensive, and uncertain.
If you're a salaried investor with ₹3–4 lakh in fixed income savings, the SBI FD at 6.8% is genuinely the smarter choice — fully insured, liquid within limits, and zero paperwork. If you're managing a larger fixed income portfolio — say ₹30–50 lakh — then allocating 30–40% to a mix of PSU bonds and diversified AAA-rated corporate bonds starts to make real sense, particularly for the yield pickup and portfolio duration management.
The honest question before buying any corporate bond is simple: do you understand who you're lending to, what you'll recover if they can't pay, and how long you're willing to wait to find out? If you can answer all three, the extra yield is yours to keep. If you can't, the FD is not a compromise — it's the right call.