If you’re an investor, you’re probably familiar with the wide range of investment options available in the Indian stock market, such as stocks, commodities, bonds, mutual funds, ETFs, etc. However, investing in corporate bonds provides a distinct chance to add diversity to your portfolio, secure a reliable income stream, and potentially see your investment grow.
This blog will explore corporate bonds, highlighting their benefits and associated risks and providing practical steps to buy corporate bonds in India.
Benefits of Investing in Corporate Bonds in India
- Predictable income: Corporate bonds offer a steady income stream in the form of interest payments, which can provide a reliable source of income for investors.
- Diversification: Investing in corporate bonds diversifies an otherwise equity-oriented investment portfolio, lowering overall risk and improving average returns.
- Creditworthiness: High-quality corporate bonds are issued by companies with solid credit ratings, which can provide a measure of security for investors.
- Potential for capital appreciation: If interest rates decline, the value of existing bonds may increase, offering the potential for capital appreciation.
- Accessibility: Corporate bonds are widely available, and you can easily purchase them through intermediaries such as banks, brokers, or mutual funds.
Disadvantages of Investing in Corporate Bonds
On the contrary, when we talk about investing in corporate bonds, it has its share of risks involved.
- Credit Risk: One major drawback of corporate bonds is credit risk. Investors may not receive interest payments or get their principal back if the issuing company goes bankrupt. Unlike government bonds with high credit ratings, corporate bonds rely on the financial stability of the issuing company.
- Event Risk: Companies can face unforeseen circumstances that hinder their ability to generate cash flow. This can affect their capacity to make interest payments or repay the principal, posing a risk to bondholders. The performance of corporate bonds depends on the issuer’s ability to generate consistent cash flow.
- Market Risk: The bond market is volatile, and changes in market conditions can impact bond prices. During certain periods, bond prices may become less attractive due to market fluctuations, affecting the value of corporate bonds.
- Liquidity Risk: Selling a corporate bond quickly and at a fair price can be challenging, especially for less commonly traded bonds with poor credit ratings. Liquidity risk arises when there is limited market demand for a particular bond, making it harder to sell the bond at favourable terms.
- Credit Rating Risk: The credit rating of a bond issuer can change over time based on the issuer’s financial stability. A downgrade in the credit rating can result in a lower bond price and increase the risk of default, impacting the value of corporate bonds.
How and Where to Buy Corporate Bonds?
Here is a step-by-step guide to buying and selling these instruments from the corporate bonds market:
- Determine your investment goals: Assess your financial goals, budget, and risk tolerance before investing in corporate bonds. Consider the investment purpose, amount, duration, and risk level.
- Research the bond market: Do your research to gain a better understanding of the bond market, including the types of bonds available, the creditworthiness of the issuers, and the historical performance of the bonds.
- Choose an intermediary: Select a reputable broker that offers a platform for buying and selling corporate bonds. Consider factors such as commissions and services offered.
Try a Shoonya by Finvasia, a zero-commission broker that offers a multi-asset online trading platform for all your investment needs.
- Open an account: Open a brokerage/Demat account to buy and sell corporate bonds. You must provide personal information, proof of identity, and proof of address to complete the account opening KYC process.
- Buy bonds: Choose the bonds you wish to purchase, taking into account the issuer’s credibility, the interest rate offered, and the maturity date of the bond.
- Monitor the bonds: After buying the bonds, track their performance. If the market conditions are no longer favourable, you may sell the bonds before maturity.
- Sell bonds: You can sell bonds before maturity through the same intermediary used to purchase them. Be aware of any fees your broker may charge, and understand the terms and conditions before deciding.
Key Takeaways
- Corporate bonds offer stable income and diversify portfolios, reducing risk and enhancing returns.
- High-quality corporate bonds provide security and reliability for investors.
- Investing in corporate bonds has the potential for growth through capital appreciation alongside regular interest payments.
- Assessing risks such as default, interest rate sensitivity, market volatility, liquidity, and credit ratings is crucial for corporate bond investments.
- Successful investing in corporate bonds involves setting goals, conducting research, selecting a reputable intermediary, opening an account, choosing suitable bonds, and staying familiar with the buying and selling process.
FAQs| Corporate Bonds
You can assess creditworthiness by reviewing the issuer’s credit ratings provided by Indian credit rating agencies, such as CRISIL or ICRA.
Indian corporate bonds come in various maturities, making them suitable for both short-term and long-term investment goals. Match the bond’s duration with your financial objectives in the Indian context.
A corporate bond in India is a financial instrument issued by a corporation to raise capital. For instance, an Indian company like Tata Motors might issue a corporate bond with a face value of ₹1,000 and a 7% interest rate to finance its expansion projects within the Indian market.
Whether corporate bonds are a superior choice compared to FDs in the Indian economy depends on your investment objectives. Corporate bonds in India can offer higher returns but come with higher risk due to market fluctuations and credit risk. On the other hand, FDs in India are lower-risk investments, typically offered by banks, but they offer lower returns.
In the Indian economy, corporate bonds are primarily categorized into two types:
Investment-Grade Bonds: These bonds have higher credit ratings, indicating lower risk.
High-Yield Bonds (Junk Bonds): High-yield bonds, often referred to as junk bonds, offer potentially higher returns; they come with elevated risk due to the higher likelihood of default.
Corporate bonds can be suitable investments offering potential benefits such as regular income and potential capital appreciation. However, their suitability depends on your individual financial goals and risk tolerance in the context of the Indian economic landscape.
_____________________________________________________________________________________
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.