Corporate bonds refer to financial instruments issued by companies to raise capital from investors. A firm will generally issue these bonds when it requires funds for its business operations, to expand its business, or to invest in new projects.
Through these bonds, as an investor, you can earn a fixed income over a specific period of time.
There are different types of corporate bonds that you can invest in based on your risk appetite and requirements. Some popular types include zero-coupon, convertible, floating, and fixed-rate bonds.
Corporate bonds are assigned a credit rating which determines the creditworthiness of the issuer. A corporate bond with high credit rating is a comparatively less risky investment compared to other corporate bonds . Read more about the features, advantages, and various kinds of corporate bonds.
Companies issue corporate bonds to raise their working capital requirements and manage other short-term business expenses. You can invest in Indian corporate bonds through bond funds or brokers.
Corporate bonds are popular because they offer a good Return on Investment (ROI). It allows you to receive regular interest on your investment and enjoy capital appreciation. The interest you earn depends on the prevailing corporate bond interest rates.
Generally, you get lucrative interest rates on your investment. They typically range between 9% and 11%. The rates may vary based on various factors.
Here are some types of corporate bonds to buy from the Indian corporate bonds market.
Zero-coupon bonds are offered at a discount and do not provide regular interest payments during their active tenure. Instead, you receive the face value of the bond at maturity. With a significant lump sum payout at maturity, you benefit from the appreciated value of the bond over time.
Convertible bonds allow you to convert them into a predetermined number of equity shares, within a specified period. Once the bond has been converted, you become a shareholder of the company. If the right to convert the bond to share has been exercised , you are not entitled to receive interest from the issuer.
Floating rate corporate bonds have varying interest rates, which are linked to a benchmark. The interest rates on these bonds adjust periodically, based on prevailing market rates.
Fixed rate bonds have a predetermined interest rate that remains constant during the tenure of the bond. You receive regular interest payouts at specific intervals till the bond matures.
Check out the following benefits of investing in corporate bonds.
Through corporate bonds, you may earn higher returns unlike depositing money in a bank account or investing in government bonds. This is because companies typically offer higher interest rates to attract more investors.
You enjoy improved liquidity through corporate bonds as compared to other fixed-income investments. Here, you have the option of buying or purchasing these bonds in the secondary market before maturity. This high flexibility of converting your bonds into cash and cash equivalents can help you cover any unexpected financial requirements.
When you purchase corporate bonds from a financially strong and profitable company, you are backed by the issuing firm’s strong cash flow and assets. This helps in enhancing the security of your invested principal amount as well as the interest payouts you receive.
With corporate bonds, you have a wide range of investment options to choose from. You can get these bonds from various participating companies across a diverse range of industries.
This allows you to choose a bond from the corporate bonds list that best aligns with your investment goals and risk appetite. In simpler words, you can choose bonds with a shorter tenure if you are looking for short-term investment opportunities and vice versa.
Here are some of the risks associated with corporate bonds you will need to consider before investing –
This is the risk that the issuer may default on interest payments or fail to repay the principal amount. It's important to assess the creditworthiness of the issuing company before investing.
Corporate bond prices are inversely related to interest rates. If interest rates rise, the value of existing bonds may fall, leading to potential capital losses for investors.
Corporate bonds may have lower liquidity compared to government bonds or stocks. It can be challenging to sell a bond if there are few buyers in the market, potentially leading to unfavourable prices.
While credit risk is the primary concern, there's also a risk that a company may undergo bankruptcy or financial distress, leading to bondholders receiving only partial or no repayment.
Investing is an essential part of your journey towards enhancing your financial security. You need to assess the creditworthiness of the company that is issuing the corporate bond. Also, it’s recommended to consider the financial health and credit rating of the firm.
Evaluate the maturity and duration of the corporate bond based on your financial goals and risk tolerance. Additionally, compare the coupon rate of the bond with prevailing corporate bond market rates.
Investing in corporate bonds can be a rewarding strategy since you get a decent ROI. This is because they offer fixed interest payments over a specified period, making them a reliable source of income.
By investing in corporate bonds, you can diversify your investment portfolio through various asset classes. Depending on the bond, you can earn steady returns while enjoying the stability associated with these high-rated bonds.
Following this, choose a corporate bond that meets your financial requirements and affordability criteria. To purchase corporate bonds in India, start your journey on Bajaj Markets. The process is quick, simple, and completely digital.
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Yes, investing in corporate bonds is a good idea since it is a safe investment option, and you receive great return on investment. However, you need to research corporate bond yields, corporate bond prices, corporate bond rates, credit rating and other factors prior to purchasing bonds.
Corporate bonds may or may not require assets for security. On the other hand, secured bonds are always backed by an asset.
The minimum face value of a corporate bond fund is ₹1,000. However, this may vary from issuer to issuer. You can start your investment journey by choosing from the list of corporate bonds in India.
Corporate bonds are associated with some risks, like interest rate fluctuations, credit, liquidity and default risk.