Corporate Bonds, FDs & Debt Funds — Credit Ladder + Post-2023 Tax

Harpreet is at his garment-shop counter in Ludhiana when a smiling agent slides a glossy pamphlet across: a “company fixed deposit” paying 12% a year. His own bank FD pays about 7%. His first thought is the honest one almost everyone has: “Same thing — a deposit — but five percent more money. Why on earth would anyone take the 7%?” A few hundred kilometres away, Lakshmi, 64 and widowed, needs about ₹50,000 a month from her ₹95 lakh (a lakh is ₹1,00,000; ₹95 lakh is ₹95,00,000). Every extra percent of yield looks like breathing room. Both of them are feeling the exact pull this lesson is about.

Here is the catch, and it is the one idea to carry through everything below: in fixed income, extra yield is never free. It is the precise price of a risk you are agreeing to take on. Sometimes that trade is worth it; often, for money you actually rely on, it is not. The goal of this lesson is not to scare you off higher yields — it is to make the trade visible, so you choose it with your eyes open instead of being sold it with your eyes closed.

• Corporate bonds and the credit ladder — why a company pays more than the government, and what the “more” is buying.
• Fixed deposits, revisited — the bank FD's DICGC safety net, and the very different “company FD.”
• Debt mutual funds — the categories, mapped to how long and how safe.
• The 2023 tax change (§50AA) that quietly reshaped the FD-vs-fund decision.
• And the honest answer to “which should I actually pick?” — which depends on your slab and what the money is for.

A government security — a G-Sec — is the government's IOU. You lend it money, it pays you a coupon, and it returns your principal at maturity. Because a government that borrows in its own currency can always, in the last resort, create that currency to pay you, a G-Sec is treated as the risk-free anchor. In this lesson we hold that anchor at about 7.7% a year, exactly as Lessons 32 and 33 did.

A corporate bond is the same machine with a different borrower: instead of the government, you are lending to a company. It promises the same things — a coupon along the way, your principal back at maturity. Only one difference matters, and it changes everything: a company can go bankrupt. If it does, your coupon and even your principal can vanish. So a company has to dangle a higher yield than the government, or no sane person would lend to it — they would just lend to the government for the same money and less worry.

Picture Harpreet with ₹1,00,000 to lend. Lend it to the government and getting it back is as close to certain as money gets. Lend it to a company down the road and you will get a bit more interest — because there is now a real, if usually small, chance the company can't pay. The extra interest is that chance, converted into a number. That is the whole concept; the rest of this lesson is just measuring it.

The extra yield a bond pays over the equivalent G-Sec has a name: the credit spread. If a 10-year G-Sec yields 7.7% and a top-rated company's 10-year bond yields 8.2%, the difference — 0.5%, or 50 basis points (a basis point is one-hundredth of a percent, so 50 of them make half a percent) — is the credit spread. It exists for exactly one reason: to pay you for the chance the company defaults. No default risk, no spread; that is why the G-Sec itself has none.

The spread is not a fixed number — it widens as the borrower gets riskier. A rock-solid company pays a sliver over the government; a shaky one has to pay a fortune, because the market demands a fat cushion before it will touch the risk. Lined up by safety, the spreads form a ladder.

Read the ladder as a single sentence: the further you climb down from the government's 7.7%, the fatter the extra yield — and the fatter the extra yield, the higher the odds the borrower doesn't pay. The market is not being generous at the bottom of the ladder; it is being paid to stand next to a fire. So when Harpreet's pamphlet offers 12% against his bank's 7%, that 5% gap is not a bargain the bank missed. It is the market's blunt verdict: this borrower is materially riskier.

Who decides how risky a borrower is? You don't have to guess — independent agencies do it for a living and publish a letter grade. That grade is the credit rating: a shorthand for the probability the borrower pays you back on time. In India the main raters are CRISIL, ICRA and CARE (India Ratings too) — the “rating agencies,” all registered with and regulated by SEBI, and affiliated to the global names S&P, Moody's and Fitch.

The scale runs from AAA at the top — highest safety — down through AA, A, BBB, BB, B, C to D, which means the borrower has already defaulted. There is one line on this scale worth memorising: BBB and above is “investment grade” (safe enough for cautious money); BB and below is “speculative,” or in market slang, “junk.” That word is not an insult — it is a category.

Two cautions before you lean on a rating. First, it is an opinion, not a promise — and opinions get revised. A bond rated AAA today can be downgraded tomorrow if the company weakens, so you always check the current rating, not the one on last year's brochure. Second, ratings can be wrong: some famous defaults were rated investment-grade shortly before they collapsed. A rating narrows your risk; it does not erase it.

Now Harpreet's pamphlet has a simple test. Where is its rating? If that 12% “company FD” carries a rating below AA — or, as is common, no rating at all — the 12% has just explained itself. It is not a better deposit; it is a lower rung of the ladder, wearing a deposit's clothes.

This is the mental correction the whole lesson turns on, so let's put a number on it. Say Lakshmi has ₹5,00,000 to place. In an AAA bond at 8.2%, it earns ₹41,000 a year. Drop one rung to an A-rated bond at 10.7%, and it earns ₹53,500 a year — a tempting ₹12,500 more. Free money? Look at the other column of the ladder: an A-rated bond defaults in roughly 1.5% of years, against essentially never for AAA.

There is a name for chasing that ₹12,500 as if it were free: reaching for yield (or yield-chasing) — stepping down the credit ladder for a higher number while treating the risk as someone else's problem. It is the single most common way careful savers get hurt in fixed income, because the higher yield shows up every month, and the default shows up once, without warning.

Against that ladder, the humble bank FD looks better than it did in Lesson 1. Recall the mechanics: you lock a sum for a term at a fixed rate. Two features make a bank FD special, and both are about certainty. First, the rate is contractually fixed — there is no NAV bobbing up and down, no market move to sweat. Second, and this is the one people forget, a bank deposit is insured.

The insurer is the DICGC (Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the RBI). It covers each depositor up to ₹5,00,000 — principal plus interest together — per bank, if the bank fails. You pay nothing for it; the bank pays the premium. It covers your savings, current, FD and recurring-deposit balances at that bank, added together. Deposits at different banks are insured separately, each up to ₹5,00,000. That is a genuine, government-backed floor under a bank FD that no corporate bond or company FD has.

The rates, for context: a top bank FD pays roughly 6.5% for a general depositor and about 7.1% for a senior citizen — that senior premium of around half a percent is a real, free bump Lakshmi gets simply for being 60-plus. The interest is taxed at your slab, every year as it accrues; you cannot defer it. The bank deducts TDS once your interest at that bank crosses ₹50,000 in a year (₹1,00,000 for seniors — both thresholds were raised in Budget 2025). And in the old regime a senior can deduct up to ₹50,000 of interest under 80TTB — which is Lakshmi's situation.

The read-out is simple. The bank FD's superpower is certainty — a fixed rate and insured principal to ₹5,00,000 a bank. Its weaknesses are the yearly tax drag and a rate that rarely beats a good bond. So the rule for the money you truly rely on is: keep it inside that ₹5,00,000 cover, and if you have more, spread it across banks so every rupee stays insured. Lakshmi's ₹20,00,000 FD sleeve, for instance, should sit across at least four banks — never ₹20,00,000 in one, where ₹15,00,000 would be uninsured if that one bank failed.

Now back to Harpreet's pamphlet, because it exploits exactly this. A “company FD” or “corporate FD” borrows the trusted word deposit, but it is a completely different animal: it is an unsecured loan to a company or an NBFC (a non-bank finance company). There is no DICGC cover — not one rupee. If the company fails, you are just an unsecured lender waiting in a queue. Its higher rate is not a better deal; it is credit risk, priced in, exactly like a bond's spread.

That doesn't make every company FD a trap. A company FD rated AAA by CRISIL/ICRA/CARE, taken in a small size, is a reasonable step up in yield for someone who understands they've left the DICGC umbrella. The danger is the low-rated or unrated one — the 12% that Harpreet is looking at from a financier nobody has heard of. That is a junk bond with an FD label. The bank's 7% is not the bank being stingy; it is the bank being safe, and insured.

Buying one bond means betting on one borrower. A debt mutual fund solves that: it pools money from thousands of investors and buys a basket of bonds — government securities, public-sector-undertaking (PSU) paper, corporate bonds — run by a professional manager. For a small investor it delivers two things a single bond cannot. First, diversification: spread across dozens of issuers, one default is a scratch on the NAV, not a wound to your capital. Second, liquidity: you can redeem on any business day at that day's NAV (the per-unit price from Lesson 8), rather than being stuck holding a single bond you can't easily sell.

Nothing is free, of course. The fund charges a TER (the expense ratio from Lesson 8 — for debt funds usually a modest ~0.3–0.5%), which quietly trims the yield. And because the fund is always holding bonds rather than one bond you hold to maturity, its NAV moves a little with interest rates — up when rates fall, down when they rise (the Lesson 32 see-saw). It is steadier than equity by a mile, but it is not a fixed line like an FD.

For Lakshmi, the contrast is the point. Instead of buying one company's bond and praying it pays, a corporate-bond debt fund spreads her across thirty-plus high-rated issuers at once, a manager watches the credit quality, and she can redeem next day if she needs the cash. She trades a slice of yield (the TER) and a little NAV wobble for diversification and liquidity — often a very good trade for the part of her money that isn't the fixed monthly floor.

“Debt fund” is not one thing — SEBI defines sixteen categories, and confusing them is how people end up surprised. But you only need two knobs to understand all of them. Duration: how long the bonds are, which sets how much the NAV swings when rates move (short = barely; long = a lot). Credit: how safe the bonds are, from sovereign down to lower-rated corporate. Every category is just a setting of those two knobs.

Two of those deserve a proper introduction. A target-maturity fund is the clever bridge between a bond and a fund: it is an index debt fund (or ETF) with a fixed maturity date — say 2032 — that holds government, State Development Loan (SDL) and AAA-PSU bonds maturing around then. Hold it to that date and you roughly lock in the yield available when you bought it (a single bond's predictability), while still getting a fund's diversification and any-day liquidity along the way. As it ages, its duration rolls down toward zero — the swings shrink as the finish line nears. (Its cousins among true hybrid products are Lesson 37's territory.)

The other idea the map reveals is the difference between two strategies. Accrual means staying short and simply collecting the interest — steady income, little rate-sensitivity; this is where Lakshmi lives (overnight/liquid for cash, short-duration or target-maturity for the rest). Duration means deliberately going long — a gilt fund — to profit if rates fall and bond prices rise. That is a rate bet, and the NAV moves accordingly. Notice the twist the grid makes obvious: a gilt fund is the safest thing on the map on credit (100% government) yet among the riskiest on price (long duration). It doesn't remove risk; it swaps default risk for rate risk. For a retiree's monthly income, that is usually the wrong swap.

Here is the one rule change that quietly reshaped this entire choice — and if you learned about debt funds before 2023, it means the old advice you may have heard is now wrong. Before April 2023, a debt-fund gain held for more than three years got indexation: the tax office let you inflate your original cost by a cost-inflation index, so only the real, above-inflation gain was taxed, at 20%. In practice that often worked out to an effective rate of roughly 10–13%. For a high earner otherwise taxed at 30%, that made a debt fund a genuine tax haven versus an FD, whose interest is taxed at the full slab every year.

Section 50AA ended that. For units of a debt fund bought on or after 1 April 2023, the entire gain is now taxed at your slab, no matter how long you held it — indexation is gone, and the gain is treated as short-term whatever the calendar says. (For FY2025-26, a “specified mutual fund” caught by this rule is one that keeps more than 65% of its money in debt and money-market instruments.) We are teaching only the investing consequence here; the full computation belongs to the income-tax track.

Let's put all three side by side with real numbers. Take ₹10,00,000 for five years, and hold the pre-tax yields the same so the only thing that moves is the tax: a bank FD at 7.0%, a debt fund at 7.5% (it holds higher-yielding corporate paper), and a direct AAA bond at 8.2%. The tax treatments differ: the FD's interest is taxed every year at your slab, the AAA bond's coupon likewise, but the debt fund's gain is taxed just once, at redemption, under §50AA. We compare at Lakshmi's low 5% slab and at a high 30% slab — a top-bracket saver like Suresh, the 55-year-old Kochi consultant on 30%.

Read the bars carefully, because the honest result is more interesting than the slogan. At Lakshmi's 5% slab, the debt fund grows at 7.17% after tax (ending near ₹14,13,848, with just ₹21,781 of tax on the gain) and edges the FD's 6.65% (about ₹13,79,762) — while the direct AAA bond leads at 7.79% (about ₹14,55,098). At Suresh's 30% slab everything shrinks under the heavier tax: FD 4.90%, fund 5.47%, bond 5.74%. So the debt fund out-earns the FD after tax at every slab — it holds higher-yielding paper and defers the tax — and the direct AAA bond beats both.

So what did §50AA actually change, if the fund still wins on yield? It changed why. Before 2023, the 30% investor's ₹4,35,629 gain would have been taxed at roughly ₹56,632 with indexation; under §50AA it is taxed at ₹1,30,689 — about ₹74,057 more. The fund used to crush the FD for a high-slab investor on tax alone; now it wins only by the slim ~0.5% of yield-plus-deferral. That is what “the call is closer” means — the debt fund is no longer a tax loophole, just a slightly higher-yielding, more flexible cousin of the FD. Which raises the real question the next section answers: if the FD loses on after-tax yield, why hold one at all?

The answer is not a single product; it is a match between the money's job and the instrument's trade-off. The debt fund won on after-tax yield — but yield is not the only axis. The FD's edge is certainty you can bank a monthly bill on: a rate fixed in writing and principal insured to ₹5,00,000, versus a fund whose NAV can dip and a single bond whose issuer could stumble. For the money Lakshmi draws every month, that certainty is worth the last half-percent. Three honest options, each with a real cost:

And the last row is Lakshmi's rule in table form, so let's say it plainly one more time: never reach down the credit ladder — into A, BBB or unrated paper — for income you are relying on. The extra yield there is default risk, and a retiree living on the corpus cannot take the hit if the 1-in-40 lands. Keep the money-you-need sleeve high-rated (AA and above), and where it fits, insured. Reach for yield only, if ever, with a small satellite you could lose without the plan noticing.

A good adviser building a retiree's income sleeve makes a very specific set of moves — and none of them involve reaching for yield. Here is the move, the logic under it, and how to copy it yourself for free.

The tell is the one to remember: an adviser who sells you a credit-risk fund — a “credit-opportunities” or “high-yield” debt fund stuffed with A and BBB paper — as a “safe, FD-plus” product is failing you, whatever the brochure says. A good one keeps the income sleeve boring and high-rated, and earns the fee on the plan and the tax-wrapping, not on quietly walking you down the credit ladder for a headline number.

Everything in this lesson now lets us name a specific, common trap — the one Harpreet's pamphlet is a mild version of. It is the corporate FD, NCD (non-convertible debenture) or “secured bond” dangling 12–15%, aimed squarely at people who need income, from an issuer whose rating is low or missing. This is not a hypothetical: DHFL and IL&FS were real companies whose paper defaulted and left ordinary lenders with deep losses, and they were rated when people bought in.

The single tell that ties them together: a yield far above the AAA line — remember, a genuine AAA bond pays about 8% — is measuring risk, not rewarding you. The words “secured” and “guaranteed” are doing the job a credit rating should do, and a rating below AA, or none at all, on money you rely on is a stop sign. The pause to check the rating and the issuer is free, and it is your best protection.

Maybe reading that landed a little too close — you already own a high-yield company FD or NCD that has gone quiet, or you have kept everything in low-rate FDs for years and are wondering what you missed. This is a different beat from the Scam Radar: that one helps you spot the trap ahead; this one is for after the stumble. Neither situation is a disaster, and both have a clean next step.

The through-line is the same as everywhere in this course: set the self-blame down — even rated paper defaulted and the whole market leaned on those ratings — then take the one useful step from today. Rebuild the income sleeve on AA-and-above and DICGC-covered FDs; move only the money you don't need on a fixed date into a short-duration or target-maturity fund; and report anything that was mis-sold to you, which costs you nothing and flags it for the next person.

Numbers land harder when they are yours. Below, put in your own amount, your years, your slab, an FD rate and a debt-fund (or bond) yield, and watch the after-tax result and the credit-rating flag update live. It starts on Lakshmi's example — ₹10,00,000, five years, a 5% slab, a 7.0% FD and a 7.5% fund — reproducing the figures above, so clear it and try your own slab.

Two things to notice as you play. One: the debt fund's edge over the FD holds across slabs but stays small — this is a yield-and-liquidity choice now, not the tax slam-dunk it was before 2023. Two: as you push the debt-fund/bond yield higher, the credit-rating flag turns amber, then red — because past the AA line, that higher number stops being a reward and becomes a warning. The calculator is the investing slice only; the full tax computation lives in the income-tax track.

• Corporate bond — a company's IOU: you lend, it pays a coupon and returns principal at maturity, but it can default, so it pays more than a G-Sec.
• Credit spread — the extra yield a bond pays over the equivalent government bond; the market's price for the borrower's default risk.
• Basis point (bp) — one-hundredth of a percent; 50 bps = 0.50%.
• Credit rating — a letter grade (AAA down to D) for a borrower's default risk; an opinion that can be downgraded.
• Rating agency — a SEBI-registered firm that assigns ratings; in India, CRISIL, ICRA and CARE (and India Ratings).
• Investment grade / speculative (“junk”) — BBB and above is safe-enough investment grade; BB and below is speculative.
• Reaching for yield (yield-chasing) — stepping down the credit ladder for a higher number while treating the added default risk as free; the classic way careful savers get hurt.
• Bank FD vs company/corporate FD — a bank FD carries DICGC ₹5,00,000 cover; a company FD is an unsecured loan to a company, with none, so its higher rate is credit risk.
• Debt mutual fund — a fund that holds a diversified, professionally managed basket of bonds; gives a small investor diversification and any-day liquidity, minus a TER and a mild NAV wobble.
• Debt-fund categories — SEBI's buckets by duration and credit; here: overnight, liquid, ultra-short, short-duration, corporate-bond, gilt, target-maturity.
• Target-maturity fund — an index debt fund with a fixed maturity date holding G-Sec/SDL/AAA-PSU bonds; hold to maturity to roughly lock the entry yield, with fund liquidity.
• Accrual vs duration strategy — accrual stays short and just earns the interest (steady); duration goes long (gilt) to bet on falling rates (volatile).
• §50AA slab-tax reset — since 1 April 2023, debt-fund gains are taxed at your slab regardless of holding period; indexation is gone.