If you are a first-time bond investor, this article could provide information that will help you decide which investment vehicle suits your needs the best.
Corporate bonds basics
A corporate bonds is a debt security issued by a corporation and sold to investors. The money raised through the sale of corporate bonds is typically used to finance business expansion, make acquisitions, or for other general corporate purposes.
Corporate bonds are issued in physical form as well as in dematerialized form. The maturity period of a corporate bond ranges from 1-10 years. The coupon rate on a corporate bond is the interest rate the issuer agrees to pay the holder periodically during the bond's life.
The redemption value of a corporate bond is its par value, which is the amount that will pay to the holder at maturity. In case of default, the issuer may not be able to pay back the entire amount owed to the bondholders. Therefore, it is essential to know the issuer's credit rating before investing in a corporate bond.
Types of corporate bonds in India
There are two corporate bonds in India: public-sector bonds and private-sector bonds.
Public sector bonds (Psu Bonds) are issued by the government or a public sector unit (PSU), while companies issue private sector bonds. Both types of bonds have their benefits and risks.
The government backs public sector bonds, so they are considered safe investments. However, they often have lower interest rates than private-sector bonds.
Private-sector bonds are riskier than public-sector bonds but can offer higher returns. When considering investing in a corporate bond, it is essential to research the company thoroughly and understand its risks.
Advantages and Disadvantages of investing in Company Bonds
Advantages of corporate bonds
• Returns:
Corporate bonds offer higher interest rates than government bonds and are a more attractive investment for those looking for income. The yield on a 10-year corporate bond is currently around 3.5%, while the yield on a 10-year government bond is just above 2%.
• Stability:
As with any investment, there is always some risk involved. However, corporate bonds are less risky than other investments, such as stocks. This is because the company's assets typically back the payments on corporate bonds, so even if the company does poorly, investors should still get their interest payments and principal back.
• Diversification:
Corporate bonds can help diversify your portfolio and reduce your overall risk. This is because the price of bonds tends to move in the opposite direction of stocks, so when stock prices fall, bond prices may rise.
Disadvantages of corporate bonds
• Interest rate risk:
Interest rate risk is one of the main risks associated with corporate bonds. This occurs when interest rates rise, and bond prices fall. This happens because new bonds are issued at higher speeds when rates go up, making existing bonds with lower rates less attractive to investors. As a result, the price of the bond falls to entice buyers. This risk can be mitigated by investing in short-term or floating.
How to buy bonds within Indian markets
Indian corporate bonds are excellent investment options that offer a high return on investment. They are, however, not easy to purchase for foreign investors. In this article, we will take a look at how to buy corporate bonds within Indian markets.
The first step is to find an authorized dealer who deals in corporate bonds. You can locate these dealers through the Securities and Exchange Board of India (SEBI) website. The next step is to open an account with the dealer.
Once you have opened an account, you can start purchasing bonds. There are two ways of doing this – through the primary or secondary market. In the primary market, you buy bonds directly from the issuing company. This is usually done via public auctions.
In the secondary market, you will buy bonds from other investors looking to sell their holdings. This is generally done through brokerages. When buying in the secondary market, it is essential to remember that prices may be higher or lower than the original issue price, depending on market conditions.
When purchasing bonds, you will need to pay attention to the bond's coupon rate and historical yield. The coupon rate is the interest rate paid out by the issuing company semi-annually. The historical yield measures how well the bond has performed about other similar investments over time.
It is also important to remember that all investments come with risk and corporate bonds are no different.
Investing Rules
1. Decide the purpose of investment- Whether you want to earn income or build capital, short-term or long-term investment.
2. Consider the company's creditworthiness- Stronger companies with good ratings are less risky and offer lower returns, while riskier ventures promise higher returns.
3. Study the coupon rate- Higher coupon rates imply lower risks and, consequently, lower returns. Lower rates mean higher risks and vice versa. Choose a bond coupon about its riskiness.
4. Compare yields with other debt instruments before investing- Yield is the return on your investment; compare it with similar investments like government bonds, debentures, etc., to get an idea of how much return you can expect from your bond holdings.
Read More About different types of bonds
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