The world of finance and financial instruments includes various kinds of investments through which both corporations and individuals can earn a certain amount of money for their respective financial needs. Corporate bonds are one of the financial instruments loved by corporations and investors.
Investors know and understand the importance of portfolio diversification in investing, and corporate bonds help investors create a diversified portfolio easily. Also, investors are attracted to higher returns, lower risks, and shorter time periods. Thus, corporate bonds serve as a useful complement to your investment plan, regardless of your level of experience.
Corporate bond investments are preferred over other riskier instruments for higher returns, portfolio diversification and the less risk it offers. If you want to explore such an investment, learn how to invest in them.
Key Takeaways
- Corporate bonds help you diversify with other investments in your portfolios.
- The returns offered are typically higher than the government bonds.
- The investment is less risky than stocks but a bit riskier than government bonds but with stable income.
- It can be traded easily in the secondary market without any worries about looking for buyers when you are selling.
- Corporate bonds are available to you with short, medium and long-term maturities, giving you flexibility considering your vivid investment goals.
What are Corporate Bonds?
Corporate bonds are debt instruments issued by corporations. Issuing corporate bonds is an additional means for businesses to raise funds without diluting ownership via new stock offerings or borrowing from a conventional financial institution. Bond issues might be private or listed on a public market.
Bond sales proceeds can be used by businesses for a variety of purposes, such as financing stock buybacks, refinancing, purchasing new equipment or buildings, investing in research and development (R&D), or supporting mergers and acquisitions (M&A).
For investors, corporate bonds offer an opportunity for portfolio diversification, providing a steady income stream, often at rates higher than government bonds.
Who Can Invest in Corporate Bonds India?
Since corporate bonds are debt securities that guarantee capital protection, their sensitivity to risk tends to be lower than that of mutual funds. The best corporate bond funds typically have a duration of one to four years, which protects investment liquidity. Thus, it is considered most appropriate for risk-averse individuals seeking high returns on their financial investments.
- When choosing whether or not to make investments in corporate bonds, investors should look into the issuer’s financial soundness, as well as the coupon rate on the bond and date of maturity.
- Corporate bonds might be an option for investors seeking a different approach from conventional fixed-income securities. This is due to the fact that corporate bonds are less risky than investments in stock and yield higher interest rates than the bonds issued by the government.
- Corporate bonds are a viable option for investors seeking market exposure. This is because corporate bonds provide both stability and income, which are important characteristics to consider while making an investment choice.
- Last but not least, investors who wish to add diversity to their portfolios might consider buying corporate bonds.
Benefits of Investing in Corporate Bonds
Investing in corporate bonds in India brings several benefits. Here are some of the benefits if you invest in corporate bonds India.
Liquidity
The primary benefit of corporate bonds is their liquidity. Bonds that have appreciated in value or those that have declined in value might both be advantageous purchases for diligent bond traders. Corporate bonds are also short-term types of funds because they are created to meet a company’s short-term funding needs. Additionally, investors have the ability to purchase and sell corporate bonds of their free will.
Better Coupon Rates
When compared to government investments, corporate bonds offer greater coupon rates and a shorter period. While corporate bonds offer coupons ranging from 7 to 12%, depending on their credit rate, government securities only offer coupons of about 6%.
Variety
The best corporate bonds can be identified based on the period of the fund and the credit ratings of the organizations selected to build the portfolio. For example, it is convenient to select low-risk bonds with a shorter period of maturity if one is searching for a short-term investment option. The market offers bonds with varying terms, including short-, medium-, and long-term bonds, as well as certain perpetual bonds (bonds with no fixed maturity date that pay a steady stream of interest indefinitely).
Security
Corporate bonds provide a lower risk than shares because corporate bonds impose a financial obligation (debt) on the corporation. At the same time, shares carry a higher level of risk because they are dependent on a company’s earnings during a single fiscal year.
What are the risks associated with investing in bonds?
You are investing, you should also know the risks associated here so that you are making a mindful investment.
- Interest rate risk: The relationship between the bond price and the interest rates is inversely related and hence when there is a rise in the interest rate, the bonds held might look less attractive as the new ones yield higher. You can sell the existing ones in the secondary market and reinvest in the new bonds for capital appreciation or hold the existing ones for income generation.
- Inflation risk: The purchasing power of the money is eroded by inflation and the capital and returns received on the investment can not make much difference to beat the inflation rate. It is wise to diversify the portfolio with other investments to tackle inflation rise.
- Default risk: The credit rating of the bond issuer offering higher interest rates can be lower and while investing you must look out for credit ratings that are ideally between BBB and AAA to receive stable returns without much risk of default.
- Liquidity risk: Certain bonds may be limited to liquidity as the demand for the same is not higher than that of the others and due to this you might sell the bond at a price that you may have not expected at a later time. Thus invest in bonds that have enough liquidity and have enough demand.
- Callable risk: Some bonds have the option of calling where the issuer can call the bond before maturity thus returning your principal earlier and interest payments will be only till the issuer calls it. That’s because the issuer can re-call the bond at a lower interest rate when the interest rates in the market are lower and in that case, you may have to reinvest in lower-yielding bonds available that time. You can avoid callable bonds for the same by investing in bonds without a callable option.
List of Corporate Bonds In India
There are several corporate bonds to invest in India. Here is a list of some of the best to invest in India.
| Corporate Bonds | Yield | Payments | Credit Rating |
|---|---|---|---|
| TATA Capital Financial Services Limited | 8.17% | Yearly | ICRA AAA |
| Mahindra Rural Housing Finance Limited | 8.07% | Yearly | CRISIL AAA |
| India Infradebt Limited | 7.89% | Yearly | CRISIL AAA |
| India Grid Trust | 7.91% | Yearly | CRISIL AAA |
| TATA Capital Limited | 7.91% | Yearly | CRISIL AAA |
| Magma HDI General Insurance Company Limited | 9.56% | Yearly | CRISIL AA |
| ECL Finance Limited | 10.15% | Yearly | CRISIL AA- |
| Indostar Capital Finance Limited | 9.51% | Quaterly | CRISIL AA- |
| Navi Finserv Limited | 11.03% | Yearly | CRISIL A |
What are some tips for investing in bonds?
Here’s what you can do for investing in bonds:
- Know your investment objective: If you know and understand how bonds will fit in your portfolio while considering also answer whether you are preserving capital want regular income or are looking for both.
- The debt portfolio must be spread: Include your portfolio with other types of bonds and debt instruments like NCD IPOs, government bonds, corporate bonds, corporate fixed deposits, and any other with varying maturities to safeguard your portfolio and make returns.
- What’s your risk tolerance: Depending on what your risk tolerance is to pick diverse instruments. Government bonds are highly rated whereas the higher yield bonds come with risk as they have lower rating.
- Do the research: See what the issuer history looks like by checking the details like bond ratings, and creditworthiness of the issuer while looking at details for your consideration like maturity date, call provisions and interest rate.
- Tax matters: Assess the tax matters of the instruments and how they fit your portfolio. There is tax exemption on interest rates in a few bonds like tax-free bonds and others which are normally taxed.
- Watch the market interest rates: This is to know if your portfolio needs any changes depending on the market rates. That lets you have clarity on what to sell and what to keep or any other adjustment in the strategy.
- Portfolio rebalancing: When needed rebalance your portfolio based on the risk, and the condition of the market that may impact your portfolio, this is to stay intact to your investment for any situation that may have to come.
- The liquidity of the bond: This matters when you want to sell in the secondary market. Suppose the bond you picked doesn’t have the kind of demand it needs then it becomes very hard to sell when you want to liquidate your funds or might have to sell it at a price you don’t want to.
- Look for an advisor: If you don’t understand all these things, that’s fine! But be sure to take the advice of a professional who can guide you well in the investments or go to an advisor who can manage the portfolio for you.
How to Invest in Corporate Bonds in India?
Investing in corporate bonds is easy and similar to the process of investing in other financial instruments.
- The first step is to open a Demat account. The account opening process is simple and easy. You just need to enter certain details, along with ID proof, address proof, and PAN card details.
- Once you have a Demat account, you can explore the different corporate bonds and their details on GoldenPi and invest in the one that fits your financial needs.
The following are the ways in which individuals can invest in corporate bonds:
- Buying bonds directly from the issuer
- By means of Online Bond Providing Platforms (OBPP)
- Using mutual funds
- Using exchange-traded funds (ETFs)
Buy Corporate Bonds with Ease
With their consistent income stream, advantages like diversification, ability to steer clear of market volatility, and possibility for higher yields than other fixed-income instruments, corporate bonds are a worthwhile addition to any investor’s portfolio. They also carry certain risks, just like any other financial tool. Just keep in mind that you do the necessary research, be aware of the risks and select bonds that will help you reach your financial objectives. With a diversified collection of corporate bonds in India, GoldenPi makes this process of researching and acquiring corporate bonds easier for you. Make investing easier with GoldenPi!
Frequently Asked Questions about Corporate Bonds
1. How to invest in corporate bonds in India?
You can begin investing in corporate bonds in India with a demat account and explore all the investment options available in corporate bonds on platforms like GoldenPi. Pick the one that meets your needs and directly invest online in the bond platform.
2. Can I invest directly in corporate bonds?
You can make investments in corporate bonds either directly or via a specialized corporate bond fund or exchange-traded fund (ETF).
3. Are corporate bonds safer than stocks?
Corporate bonds have the potential to generate a steady income. There are numerous types of corporate bonds available to investors. In general, they are less volatile and risky than stocks.
4. What is the ROI of corporate bonds?
Compared to other financing options available in the market, corporate bond funds offer much better returns. Corporate bond investments yield an average of 8–10%, whereas government-held bonds only yield about half of that.
5. Are corporate bonds a good investment?
The most significant advantage of corporate bonds is stability. Bonds typically perform well in all economic conditions for as long as the company that issues them is in good financial health.
6. What is the minimum amount to invest in corporate bonds in India?
The minimum amount that can be invested in corporate bonds varies according to the bond’s value and the issuer’s conditions. You can start the investment with as low as Rs. 10,000 on GoldenPi.
