Corporate Bonds Have Delivered A 4-Year Return Nearly 5% Higher Than The Nifty 50: Bet On Debt Investments?

For many years, whenever investment options are discussed, preferences have been given to equities due to their potential for exponential growth in the long run and their superior returns over other investment options. Bonds have been perceived as an instrument for stable income and often sidelined in investment conversations. However, this perception has begun to change since the onset of the decade.

Between 2020 and 2024, the Nifty 50 delivered an average annualised return of about 12% while during the same time period, AAA-rated corporate bonds delivered close to 17% annualised returns. This is seen as an anomaly to traditional wisdom—how can bonds outperform equities in terms of returns? In this matter, there were several factors simultaneously at play that shaped this story over the past few years.

In 2020, the COVID-19 pandemic hit the world rather hard. With the onset of mass infections and global lockdowns, global indices fell sharply, and economies declined. To counter these moves, governments around the world adopted expansionary monetary policies to maintain liquidity in the system, and interest rates were slashed.

"While this helped to provide a cushion to markets to double by mid-2021 from the March 2020 levels, this stability was short-lived as inflationary pressures mounted, leading to a sharp rise in interest rates. As a result, foreign investors began pulling out their money from Indian markets, profits slowed down, and stock prices became volatile," said Tushar Sharma, Co-founder at Bondbay.

This created a rather strange trend where certain big companies did well, but most mid- and small-cap companies lagged behind. This gave modest returns in the next 2 years. Bonds, on the other hand, benefited from the policies aimed at stabilising economies and markets.

"When the RBI decreased the repo rate from 5.15% to 4% in 2020, yields on corporate bonds fell. Since the price of bonds moves inversely to interest rates, investors holding bonds issued at higher pre-COVID rates saw their market values surge, resulting in significant mark-to-market gains. Bond funds that held longer-duration bonds even benefited more from these yield declines," commented Tushar Sharma, Co-founder at Bondbay.

For instance, funds like ICICI Prudential Corporate Bond Fund and HDFC Corporate Bond Fund reported annualised returns of 16-17% between 2020 and 2024, higher than the typical range of 7-8%. This was because, in addition to earning regular coupon income, investors saw an additional strong capital appreciation of the older, high-yield bonds. Even after yields stabilised around 7.5-8% in the later years, steady coupon payments helped sustain attractive overall returns.

While these returns are encouraging, it should be noted that such periods are rather exceptional and are driven by responses to larger economic crises.

"Going forward, bond returns are expected to stabilise at current yields of 8-12% which still makes them an attractive, stable income option. The goal is not to chase short-term gains but to see bonds as a dependable component of a well-balanced portfolio - one that cushions volatility, ensures steady income, and preserves wealth through changing market cycles," stated Tushar Sharma.

At the same time, the environment for fixed-income investing is evolving. With increased transparency, simpler access, and the emergence of Online Bond Providing Platforms (OBPPs) like Bondbay, retail investors can explore and invest in bonds very easily. These platforms raise awareness about bonds and help investors make informed long-term investment decisions.

Disclaimer: The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of Goodreturns.in or Greynium Information Technologies Private Limited (together referred to as "we"). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.