Bonds are one of the major components of the Indian debt market as well as an integral part of the Indian economy. Of the several types of bonds in India, corporate bonds enjoy the badge of a safe yet high-return investment instrument.
As per a report conducted by CRISIL, the domestic corporate bond market is expected to witness a massive supply of Rs. 60 lakh crore – Rs.70 lakh crore by FY-25 from Rs. 30 lakh crore presently. Issuance from the infrastructure sector is estimated to be Rs. 5.5 lakh crore – Rs. 7.7 lakh crore, whereas the banking sector may contribute up to 50% in this supply surge.
With such a promising prospect on the horizon, investors can lock their earnings by investing in corporate bonds. To that end, one can consider KredX, an online investment platform of bonds, PMS and digital gold, for an easy and fuss-free experience. However, before proceeding to invest in corporate bonds, one must be familiar with its various aspects.
What Is A Corporate Bond?
Corporate bonds are a type of debt security issued by public and private corporations. Companies issue corporate bonds to finance several projects/purposes, such as manufacturing new plants, buying new machinery, or expanding their business.
The investor lends money to the ‘issuer’, i.e., the company issuing the bond. Such issuer promises to repay the borrowed amount – principal – upon maturity. The company also pays out interests, usually semi-annually, at a pre-set rate during the lock-in period until maturity.
When one invests in corporate bonds, the issuer offers an IOU. Note that it does not entail an ownership stake in the issuing company, unlike when one buys its equity stocks.
What Types Of Corporate Bonds Are Available In India?
Corporate bonds are divided into the following categories:
Based on Maturity
- Short-term Maturity – These types of bonds come with a maturity period of less than one year and are considered the safest as they are held for a short period.
- Medium-term Maturity – These debt instruments feature a maturity period of 1 year – 5 years.
- Long-term Maturity – Long-term bonds come with a maturity period of more than 5 years.
- Perpetual – These bonds involve no maturity period. In India, only banks issue perpetual bonds.
Based on Coupon (Interest)
- Fixed-Rate Bonds – The coupon or interest rate does not change throughout the life of such bonds.
- Floating Rate Bonds – The interest rate changes, i.e., it is reset after a certain timeframe on the basis of the benchmark rate.
- Zero-Coupon Bonds – These types of bonds involve no interest payout until maturity. However, zero-coupon bonds offer a single payment upon maturity, which is higher than its initial purchase price.
Based on Conversion
- Convertible Bonds – Such bonds let investors convert their holdings at face value to equity shares. Thus, investors can enjoy the guarantee of periodic returns along with the option to obtain a stake in company ownership at a later date, should they choose to convert.
- Non-convertible Bonds – This variant does not proffer the option of conversion, meaning investors need to redeem their bonds at the maturity period’s end.
Corporate bonds are further classified into two segments, namely,
Based on option: (a) Call option, (b) Put option
Based on Redemption: (a) Single Redemption, (b) Amortizing bonds
What Are The Benefits Of Investing In Corporate Bonds?
The following are a few advantages one can enjoy by investing in bonds –
- Increased Yield – This debt instrument usually offers higher returns than other types of bonds available in the market. However, high-yield corporate bonds often entail more significant risks.
- Fixed Regular Income – Corporate bonds obligate the issuer to disburse periodic interests and repay the principal upon maturity. Hence, individuals can consider investing in such an instrument to diversify their portfolio and hedge against stock price fluctuations.
- Security – CRAs thoroughly evaluate corporate bonds and assign a rating on the basis of such a company’s repayment capability and credit history. Thus, a higher rating indicates a safer investment avenue.
- Diverse Options – Investors have various options at their disposal via KredX. They can invest in bonds from different sectors or of different ratings as per their suitability.
How To Buy Corporate Bonds?
In India, one can buy corporate bonds in three ways.
1. Through A Broker – An investor must possess a detailed knowledge of the issuing company to avoid any ‘default risk’.
2. Via Mutual Funds Or Exchange-Traded Funds (ETFs) – Investment through this medium allows investors to ensure diversification and professional management. Here, investors only need to check the fund’s holdings and decide accordingly.
3. Through Digital Investment Platforms – Investors can also buy corporate bonds online through third-party platforms like KredX.
Those looking for a medium to long-term investment avenue with low risk and high returns can consider corporate bonds an ideal and safe option. However, they must be familiar with a company’s present financial standing and its estimable prospects to make an informed choice.
Frequently Asked Questions
FAQs on Corporate Bonds:
A. Corporate bonds and interest rates are inversely related. When interest rates rise, the worth of older bonds dip, and vice versa. Hence, if an investor sells a bond before maturity, he/she realises more or less than what he/she paid.
A. Default risks – In case a corporate bond issuer goes out of business, it will fail to repay the principal amount.
Interest rate risks – Corporate bond prices may fall if the interest rate goes upwards or inflation strikes.
A. Investment-grade corporate bonds are issued by companies with high credit ratings and offer higher returns than government bonds during stable economic conditions.
A. Yes, corporate bonds offer higher interest than bank deposits.
A. Bonds’ values, in general, have increased due to market interest rates being at an all-time low amid the current economic concerns.