What Are High Yield Bonds and Why Are They Risky?

When we think about investing in bonds, the first thing that usually comes to mind is safety. Bonds are known for offering steady returns without taking on too much risk. But there’s a different type of bond out there that promises higher returns, these are called high yield bonds. The catch? They come with a fair amount of risk.

What Do We Mean by High Yield Bonds?

High yield bonds are those that offer more interest than regular bonds because the companies issuing them don’t have the strongest credit ratings. These are not your government bonds or bonds from reputed companies. Instead, these are issued by firms that might be growing fast or facing financial pressure. Since they are seen as a bit riskier, they have to pay investors more to compensate for that risk.

In India, we often come across such bonds issued by NBFCs or lesser-known corporates. The returns can go up to 10 or 12 percent in some cases, which sounds great when compared to 6 or 7 percent from safer options.

So Why Are They Considered Risky?

The main risk is that the company might not be able to pay back what it owes. When a business has a weak balance sheet or inconsistent cash flows, there’s always a chance it might default on interest payments or even the principal. That’s called credit risk and it’s quite real when it comes to high yield bonds.

Also, these bonds tend to react more to what’s happening in the economy. If there’s a slowdown or interest rates shoot up, people get nervous and may pull out, making it harder for you to sell the bond if needed. Sometimes there’s just not enough demand, which means you might struggle to exit without taking a loss.

Should You Be Investing in These?

If you’re someone who’s okay taking a bit of risk for better returns and you understand how credit ratings and debt markets work, high yield bonds can be part of your portfolio. But they’re not for everyone. A conservative investor looking for capital protection and steady income might want to avoid them.

A good rule of thumb is not to put all your money into one high yield bond. Spread it out, mix it with safer investments, and always keep track of what’s going on with the companies you’ve invested in.

What You Should Watch Out For

Before putting your money into a high yield bond, ask yourself a few things:

• Do I understand the business behind this bond?
• Has the company been downgraded recently or are there signs of trouble?
• Is the higher return worth the added risk?
• Will I be able to sell this bond if I need to get out early?
• Is there a chance the company could call back the bond before maturity?

Asking these questions can help you make a more informed decision.

Final Thoughts

High yield bonds aren’t bad — they’re just not simple. They offer better returns, yes, but they also demand more attention. You need to stay updated on the issuer, the market conditions, and your own risk appetite. For many investors, especially those just starting with bonds investment, it makes sense to begin with safer options and slowly explore high yield ones once they’re more confident.

In the end, it’s all about balance. A little extra yield might be tempting, but make sure it fits into your larger financial plan.