AAA Rated Bonds

AAA rated bonds in India

AAA bonds are the highest rated corporate bonds available in India. The name 'AAA' comes from the credit rating that credit rating agencies like CRISIL, ICRA, CARE, etc award the Bonds.

Who can issue AAA bonds?

AAA bonds can be offered only by corporations with excellent financial health or backed by the government (like PSUs). If a corporation doesn't have top-notch financial health, credit rating agencies will not award them a 'AAA' rating but rather a 'AA' rating or lower.

Why are government bonds not rated AAA?

Government Bonds (state and central) are considered to be risk-free and have a sovereign rating. A sovereign guarantee is considered to be even higher than the AAA rating.

AAA-rated bond's interest rates

AAA-rated bonds are considered to be safe and their interest rate ranges from 3%-8% depending upon the bond tenure. In investing, low-risk instruments (like AAA rated bonds) offer low returns whereas high-risk instruments (equity) offer high returns. 

Advantages of investing in AAA bonds

The biggest advantage of investing in AAA bonds is the safety of capital. Because the companies that issue AAA bonds have excellent financial health and are extremely unlikely to default on the interest and principal payments.

Disadvantages of investing in AAA bonds

The biggest disadvantage of investing in AAA bonds is that they don't offer high-interest rates because their demand is high among bond investors. High or very high interest rate is generally offered by AA and lower-rated issuers to attract investors. The interest rates offered by AAA bonds is only slightly higher than the interest rate of government bonds that have a sovereign rating.

AAA bond rating companies

Bond rating companies are also called credit rating agencies. They decide whether a Bond should be rated AAA or lower. Some examples of credit rating agencies are CRISIL, CARE, ICRA, Fitch Ratings, India Ratings and Research, etc.

Risks of investing in AAA bonds

AAA bonds are subject to the same risk as most other bonds - credit default, liquidity, reinvestment and interest rate. However, credit default risk in AAA bonds is lowest among the universe of Corporate Bonds.

What is the difference between AAA and AA bonds?

AAA bonds are safer but not necessarily better than AA Rated Bonds. AA bonds offer a higher interest rate than AAA bonds and investors who are comfortable with the extra risk can consider investing in AA bonds instead of AAA bonds.

Taxation of AAA bonds

Taxation on interest of AAA bonds: Interest earned from AAA bonds is taxed as per your marginal income tax slab rate.

Taxation on capital gains of AAA bonds: For listed AAA bonds, the long-term (more than 36 months) capital gains tax rate is 10%, and the short-term (less than 36 months) capital gains tax is the investor’s marginal income tax slab rate. For unlisted AAA-rated bonds, the long-term (more than 12 months) capital gains tax is 20% with indexation benefit, and the short-term (less than 12 months) capital gains tax is the investor’s marginal income tax slab rate.

Who should invest in AAA bonds?

Investors who are looking for the safety of capital and fixed-income generation should consider investing in AAA bonds. Further, AAA bonds generally offer high returns than fixed deposits without equally higher risk. So, AAA bonds may be considered an alternative to investing in fixed deposits. Finally, AAA bonds can help investors diversify their investment portfolio beyond equity mutual funds/stocks.

What is the difference between AAA and BBB bonds?

AAA and BBB bonds are very different regarding the credit risk they are subject to. AAA bonds are considered to be safe for investment, whereas BBB bonds are considered to be moderately risky.

How to identify the best AAA rated bonds for investment?

PSU AAA-rated bonds are safer than AAA bonds issued by private sector companies. This is because the government backs PSUs. Yet AAA bonds issued by private companies may be the best choice for some investors who are okay with the slightly higher risk. Further, investors can compare the yield to maturity to identify the best AAA-rated bonds. Finally, investing in a bond with a maturity period roughly equal to the investor’s horizon is wise. This reduces the chance that the investor will withdraw money before maturity and, in the process, eliminate risks associated with the bond price and liquidity. Following these thumb rules, any investor can select the best AAA-rated bonds for himself.