What are corporate bonds and how to invest in them?
There are many investment instruments in India like bank deposits (fixed deposits and recurring deposits), mutual funds, equity, real estate, gold, etc. Like these, there is another financial instrument from the debt or fixed interest rate category called corporate bonds. Let’s get to know about them in detail.
What are corporate bonds?
As the name implies, these are bonds or fixed income instruments issued by corporates – private and public limited companies. If any company wants to raise capital from the market, it can go to equity markets, get itself listed and launch an IPO to raise money. Another route is taking debt – they can approach a bank for a loan or issue corporate bonds to raise money.
How do corporate bonds work?
Corporate bonds are similar to government bonds (G-Sec), with the difference being that companies issue them. The company gets the money from investors, and in return, they promise to pay a fixed coupon (interest) regularly (monthly, quarterly, bi-annually, or annually) till maturity. On maturity, the company returns the borrowed amount to the investors.
Before understanding how to buy corporate bonds, let’s first look at the pros and cons of corporate bonds.
Advantages of investing in corporate bonds
- These bonds generally have higher coupon rates than G-Sec, which means more interest for you.
- To hedge against rising inflation, investors can opt for corporate bonds as they come with a shorter tenure than government-issued bonds.
- Liquidity is not a concern with these types of bonds; you can easily buy and sell them in the secondary market.
- Though it is rare, in the event that the company goes insolvent, bondholders are given preference over shareholders.
Disadvantages of investing in corporate bonds
- These bonds usually come with a minimum investment amount that is higher, usually in thousands, unlike the SIP (Systematic Investment Plan) minimum amount in a mutual fund which is usually Rs. 500, with some even being available for Rs. 100.
- Though returns are fixed as coupon rates are fixed, returns from corporate bonds are usually lower than those of equity asset class.
- There’s a higher risk involved as compared to government bonds, as governments mostly will never default on their repayment obligations.
How to invest in corporate bonds?
If you want a steady source of income from investment returns, consider investing in corporate bonds. Apart from fixed returns, you also get the opportunity and benefit of portfolio diversification. These bonds will help your portfolio deliver positive returns when equity markets are down. Let’s now see how to buy corporate bonds in India.
You can either invest in corporate bonds through your stockbroker or directly through the stock exchange (BSE or NSE). These bonds are freely traded on these exchanges, or you can invest in corporate bonds through mutual funds. There are debt mutual funds, Exchange Traded Funds (ETFs), and hybrid mutual funds that have exposure to corporate bonds. This is how to invest in corporate bonds.
We hope you now have a good idea of what corporate bonds are, the pros and cons of the investment, and how to invest in them. To get an even better understanding and plan your investing strategy, you can consult a financial expert.