The concept of investment has always been a nerve-racking and befuddling process, despite everyone having a profound desire to have an alternative income in their life. The search for accurate alternative methods of investments has been infinite and has yet to find a right determinant of investments that can yield better returns consistently. Therefore, most of us are predominately sheltering our faith and trust in the traditional methods of investments on FD and Bank savings that keep the money safe with lower returns. Lately trends have emerged to invest in equity markets which never promise a consistent fixed return for investment and comes with a lot of risk when compared with traditional methods. But, there is an alternative method that can yield higher returns than any other. Though it has been prevailing for a long period since 1871 in India, still, it is in a nascent stage because the concept has not been exposed adequately and lack of sufficient knowledge compared to other developed markets. A corporate bond yields better and more reliable fixed returns when compared to a fixed deposit.
The concept of corporate bonds can be highly confusing and one can have lots of questions in mind, Should I consider investing, and if so, how will I assess the bonds and what is the bonds market size in India, and so on. This article may assist you to unlock the myths and have a better understanding of corporate bonds in India before you arrive at any decision.
What is a corporate bond?
A corporate bond is a debt obligation issued by a company in order to raise funds. Corporate bond buyers are lending money to the company, and the company is legally obligated to pay the agreed-upon interest rate to bondholders. When a corporate bond matures, or, the term expires, the company repays the bondholder.
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Types of Corporate bonds
- Convertible bonds
- Non- convertible bonds
- Security bonds
- Mortgage bonds
- Collateral trust bonds
- Equipment trust certificates
- Debenture bonds
- Guaranteed bonds
- High yield corporate bonds
Convertible bonds – These bonds can be converted into predetermined number of common stock or equity. Converting a bond to stock is possible at various points during the bond’s life and is usually at the discretion of the bondholder.
Non-Convertible bonds- These bonds cannot be converted into common stock or equity. It will be merely a bond purchase.
Before investing in bonds, it’s required to understand the corporate bond market size and its exponential growth rate over the years which will give scope of investment plan.
Bond Market Size Global and India
As of 2019, the global GDP was estimated to be US$ 87 trillion and the equity market cap was US$ 95 trillion. The Global Bond market cap was US$ 106 trillion (Source: SIFMA).
As far as India market is concerned, the GDP was estimated to be US$ 2.7 trillion and the equity market cap was almost the same number at US$ 2.75 trillion (Source BSE). But the Indian bond market stands at US$ 2.5 trillion (Economic Survey).
Corporate bond market turnover
The Indian corporate bond market rate of 59.86% is better than other countries like South Korea (42.38%), Malaysia (15.04%), China (11.52%), but is behind USA (68.56%).
Growth Rate of Corporate bonds
Though the India bond market is highly dominated by Government bonds, yet corporate bonds have grown more than four times in the last decade from INR 8.33 lakh crores to INR 32.5 lakh crores (bonds outstanding in fiscal FY2010 to FY 2020). According to crisil’s report, Indian corporate bond’s market outstanding is expected to reach Rs.67-70 lakh crore by 2025.
Corporate bond Market share of investors
Thus far, you might have an understanding of the fundamentals of Corporate bonds and its market size and performance.
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How to select a corporate bond?
Selecting a corporate bond can be an arduous task for retail investors as every one may not have adequate skill and knowledge or the time to track the market before investing.
Research on bond issuer
It is better to do a basic research on the issuer of the corporate bonds. One has to essentially understand the issuer’s financial stability over the last five years. If the issuer’s fiscal years’ performance is indeed exponentially growing, then, you need to research the purpose of issuing the bonds. It can either be for expanding the same portfolio or diversifying the business.
In case, the financial performance has been in negative cash flow, then you need to understand whether the business has market potential for the next ten years that will give you the clarity you need to invest in particular bonds.
It’s better always to research the performance of the bond issued by the company in the recent past, whether the interests and principal payments were paid timely or not.
Price of bonds & Its Maturity
Whether you are a first time investor or a frequent investor it is mandatory to evaluate the bonds rate, whether the bond is sold at a discounted rate or at a rate higher than the face value. Your investment will also be based on your financial strength, how much you are willing to invest and the investment term plan.
Based on your investment and expected interest return plan, you have to choose the bonds and its maturity period.
Coupon Rate
Coupon rate is one of the most significant factors in deciding to invest in corporate bonds. Coupon rate varies depending on the bonds and its issuer. Bond investors need to appraise the coupon rate in comparisons to FD’s interest rate. If both are either equal or a mere 1 % difference, then the particular corporate bond has to be reconsidered.
It’s always sagacious to choose corporate bonds which provide higher coupon rates.
Yield
Yield is the paramount consideration whenever any investor is deciding to invest in a corporate bond. It is the factor that allows comparing one bond to another before considering investing. However, the interest rate fluctuates constantly and it is not a fixed measure. As a result, yield can be measured in two ways: current yield and yield to maturity. The current yield is the annual return on the amount paid to purchase a bond, regardless of maturity. The yield to maturity is the total return you will receive if you hold that bond until it matures.
Credit Rating
Credit rating is another vital component in deciding investment in corporate bonds. Credit rating has been given depending on various factors including quality of business, the strength & weaknesses, profits, existing debt on the balance sheet and the company’s ability to service it.
AAA is the highest rating which signifies adequate safety for investors and similarly, there are other ratings as well, such as A, BBB etc.
These ratings are given to the company at a given period. The business environment can change and the issuer probably goes for more debt or repays existing debt credit then its profile changes.
Therefore, investing in corporate bond needs a stern consideration before deciding because corporate bonds would offer steady income and diversification on your investment portfolio.
