The fixed income markets of India have evolved and expanded, providing investors access to a variety of securities apart from the typical savings options. Two among such are the corporate bond and the securitised debt instrument (SDI). Both belong to the debt securities category but vary significantly in terms of structure, returns, and risks involved. Here’s a detailed blog on corporate bonds vs SDI.
What are Securitised Debt Instruments?
Securitised Debt Instruments (SDIs) are investment products backed by a group of loans or other receivables. They allow investors to gain exposure to a diversified pool of underlying assets rather than a single borrower. The income received from the underlying assets is used to make payments to the investors.
What are Corporate Bonds?
Corporate bonds are debt instruments issued by companies to raise funds. When an investor purchases a corporate bond, the investor lends funds to the issuing company for a specified period. In return, the company generally pays periodic interest and repays the principal amount on maturity.
Corporate Bonds vs SDI: Key Differences
The table below outlines the core differences between corporate bonds and SDIs across the parameters most relevant to investors.
| Basis | Corporate Bonds | Securitised Debt Instruments (SDIs) |
|---|---|---|
| Meaning | Debt instruments issued by companies to raise funds from investors. | Instruments backed by a pool of financial assets, such as loans, receivables, or lease payments. |
| Repayment Source | Interest and principal payments are made by the issuing company. | Investor payments are derived from the cash flows generated by the underlying asset pool. |
| Exposure | Investors are primarily exposed to the credit risk of the issuing company. | Investors are primarily exposed to the performance of the underlying asset pool. |
| Underlying Assets | May be secured or unsecured, depending on the bond structure. | Backed by identified financial assets that have been securitised. |
| Credit Assessment | Ratings generally consider the issuer's financial strength, repayment capacity, and other relevant factors. | Ratings generally consider the quality of the underlying assets, transaction structure, credit enhancements, and other relevant factors. |
| Issuing Structure | Issued directly by the borrowing company. | Typically issued through a securitisation structure involving a Special Purpose Vehicle (SPV). |
| Cash Flow Dependence | Depends on the issuer's ability to service its debt obligations. | Depends on the repayment performance of borrowers in the underlying asset pool. |
| Use of Proceeds | Funds raised may be used for business operations, expansion, refinancing, or other corporate purposes. | Created by pooling existing financial assets and converting their future cash flows into investable securities. |
*Figures and tax rates are subject to change. Please verify current rates and applicable rules before investing.
Returns Comparison: Yields and Interest Rates
| Instrument | Indicative Yield Range | Return Type |
|---|---|---|
| AAA-rated Corporate Bonds | 7%–8.5% p.a. | Coupon payments + potential capital gains |
| A/BBB-rated Corporate Bonds | 9%–12% p.a. | Coupon payments + potential capital gains |
| SDIs (varies by tranche and asset pool) | Linked to underlying asset risk and tranche structure | Cash flow payouts from underlying asset pool |
*Rates are indicative and subject to change. Past performance does not indicate future outcomes.
Corporate bonds may offer relatively defined yields depending on the issuer's credit rating. AAA-rated corporate bonds have historically indicated yields in the range of 7%–8.5% per annum, while bonds rated A or BBB may indicate yields between 9% and 12%. These figures vary with market conditions and interest rate cycles.
SDI yields are linked to the performance of the underlying asset pool and the tranche structure of the instrument. Senior tranches, which carry relatively lower risk, may offer lower yields, while junior tranches may offer higher yield potential in exchange for greater exposure to pool performance risk. Unlike corporate bonds, SDIs do not offer capital appreciation through secondary market price movements in the same way, as returns are primarily driven by the cash flows of the underlying assets.
Risk Profile Comparison
The two instruments carry different types of risk, and it is important for investors to understand these distinctions before making any allocation decision.
| Risk Type | Corporate Bonds | SDIs |
|---|---|---|
| Issuer Concentration Risk | Exposure is concentrated in a single issuing company. Financial stress in the issuer can affect coupon payments and principal repayment. | Exposure is spread across multiple borrowers or loans within an underlying asset pool, reducing single-entity dependency. |
| Diversification / Pool Risk | Limited diversification since repayment depends on one issuer. | Exposure is distributed across a pool; impact of a single loan default is generally limited. |
| Tranche Risk | Not applicable in tranche structure. | Structured in tranches; senior tranches are paid first and carry lower risk, while junior tranches absorb initial losses. |
| Default Risk | In case of default, secured bondholders have claims on pledged assets, while unsecured bondholders rank lower in repayment priority. | Higher-than-expected defaults in the underlying pool may reduce payouts depending on tranche position and pool quality. |
| Asset Performance Risk | Depends on issuer’s financial health and ability to meet obligations. | Depends on performance of the underlying asset pool and borrower repayment behaviour. |
| Downgrade Risk | Credit rating downgrade may reduce bond market value. | Decrease in asset pool quality or performance may lead to rating downgrade of the instrument. |
| Interest Rate Risk | Bond prices may decline when market interest rates rise; sensitivity depends on duration. | May be impacted by interest rate movements depending on underlying asset structure and cash flows. |
Liquidity and Early Withdrawal
Listed corporate bonds may be sold on the secondary market through the NSE or BSE before the end of the stated tenure. However, bond market liquidity in India is uneven. Larger, relatively higher-rated issuances tend to have better secondary market depth, while smaller or lower-rated issues may have thinner trading volumes, making it more difficult to exit at a fair price.
SDIs generally have more limited secondary market liquidity compared to listed corporate bonds. PTCs in particular tend to be held to maturity by institutional investors, and retail exit options before maturity may be limited. NCD-structured SDIs listed on exchanges may offer relatively better liquidity, though this also depends on market depth for the specific issuance.
It is important for investors to assess liquidity needs carefully before allocating to either instrument, particularly for longer tenures.
Tax Treatment: TDS and Capital Gains
Tax treatment differs between the two instruments and across the structure of SDIs.
Corporate Bond Taxation
- Coupon Interest: Coupon interest is taxable at the investor's applicable income tax slab rate and is subject to Tax Deducted at Source (TDS) at 10%.
- Long-Term Capital Gains: If a listed bond is held for more than 12 months and sold on the secondary market, gains are taxed at 12.5% as per the Finance Act 2024.
- Short-Term Capital Gains: If a listed bond is sold within 12 months, gains are taxed at the investor's applicable slab rate.
SDI Taxation
- NCD-Structured SDIs: Interest payouts are subject to TDS at 10%, in line with the treatment of other NCD instruments.
*Tax treatment depends on individual circumstances. Consulting a qualified tax professional is advisable. TDS is applicable as per prevailing Income Tax rules.
How to Invest
Accessing both corporate bonds and SDIs has become significantly more straightforward through digital platforms.
Create an Account:
Registration on financial platforms requires basic personal and contact details to get started.
Complete KYC Verification:
This includes Permanent Account Number (PAN) verification and Aadhaar-based authentication, which is a regulatory requirement for all investment transactions in India.
Browse Available Instruments:
The digital platforms list corporate bonds and SDIs with details including coupon rate or indicative yield, credit rating, issuer or SPV name, tenure, and tranche information where applicable.
Review Credit Ratings and Offer Documents:
Before committing capital, it is important to review the instrument's credit rating, the issuing company's or SPV's financial track record, and the offer document. For SDIs, reviewing the underlying asset pool composition, tranche structure, and payout mechanism is vital.
Place the Investment:
Select the amount and confirm the transaction. Corporate bond purchases are settled through the depository system (NSDL/CDSL) and reflected in the investor's Demat account. SDI investments follow the settlement process applicable to the specific instrument structure.
Track Payments and Tenure Schedules:
Coupon payments from bonds and cash flow payouts from SDIs are trackable within the platform, along with upcoming payment dates and portfolio composition.
Conclusion
Corporate bonds and SDIs are both unique investments in their own ways and have their own place in the world of fixed income. Corporate bonds are supported by the creditworthiness of a single corporate issuer with the ability to sell on the secondary markets. Whereas, SDIs provide the investor with diversification from a pool of assets via SPVs, with yield based on the performance of the asset pool and position of the tranches. Assessing these differences carefully, in the context of one's own financial goals and risk tolerance, is an important step before making any allocation decision.
FAQs on Corporate Bonds vs SDI
What is the difference between corporate bonds and SDI?
Corporate bonds are debt securities issued by companies, where investors lend directly to the issuer. SDIs are instruments issued by SPVs backed by a pool of underlying assets such as loans or receivables, with payouts linked to asset pool cash flows.
Which may offer higher returns: corporate bonds or SDI?
SDIs may offer higher yield potential depending on the tranche structure and underlying asset risk. Corporate bonds offer relatively defined yields based on the issuer's credit rating. All rates are indicative and subject to change.
What is the minimum investment amount for corporate bonds?
For listed corporate bonds on OBPP platforms, the minimum investment is typically Rs 1,000. However, it can vary for different bonds.
How is TDS different for SDIs and corporate bonds?
Corporate bond coupon payments attract TDS at 10%. For SDIs, TDS is 10% for NCD-structured instruments and 25% for PTC-structured instruments. TDS is applicable as per prevailing income tax rules.
Disclaimer:
The information contained in this Article (“Article”) is for general informational purposes only. Northern Arc Capital Limited (“Northern Arc”) does not make any warranties about the completeness, reliability, and accuracy of this information. Any action you take upon the information contained in this Article is strictly at your own risk, and Northern Arc will not be liable for any losses and damages in connection with the use of our Article.
The data included in this Article has been obtained from sources that are believed to be reliable and accurate at the time of publication. However, Northern Arc does not guarantee the accuracy or completeness of any information, nor does it assume any responsibility or liability for any errors or omissions therein. Any opinions expressed herein are subject to change without notice and Northern Arc is under no obligation to update or keep current the information contained in this Article.
This Article is not intended to constitute, and should not be construed as, investment advice or a recommendation to purchase, sell, or hold any security or to engage in any investment strategy or transaction. Readers should not rely solely on the information provided in this Article for making investment decisions and should conduct their own due diligence or seek the advice of a qualified professional.
The content of this Article is for informational purposes only and is not a solicitation or an offer to buy or sell any securities or financial instruments. Northern Arc is not responsible for any investment decisions made by the recipients of this Article. Readers should take independent financial advice from a qualified professional in connection with, or independently research and verify, any information that is provided in this Article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
Northern Arc and its affiliates, directors, employees, and agents expressly disclaim any and all liability for any direct or indirect losses, damages, or expenses of any kind arising out of or relating to the use of this Article, including but not limited to, any losses related to the accuracy, completeness, timeliness, or reliability of such information.
This Article may contain forward-looking statements that are based on current expectations, estimates, forecasts, and projections about the markets in which Northern Arc operates, as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
This report is intended solely for the recipient and is not for further circulation. Any distribution, modification, reproduction, or disclosure of the contents of this Article, in whole or in part, without the prior written consent of Northern Arc, is strictly prohibited.