Corporate Bonds

Corporate bonds are a type of debt securities issued by public and private companies. The funds raised through these bonds are used for various purposes. This includes purchasing equipment, buying/building a new plant, etc. 

When you buy a corporate bond, it is an act of lending money to the company. In return, the issuer returns the principal with interest on the maturity date. This interest rate may be paid semi-annually, depending on the company's policies.  For investor safety, corporate bonds are assigned a safety rating by credit rating agencies like CRISIL. A higher rating indicates a less risky investment.

There are four different types of corporate bonds based to cater to the diverse needs of investors. These include: 

1. Mortgage Bonds

Mortgage-backed securities are bonds secured by a variety of assets. If the issuer defaults, the underlying mortgages can be sold to potentially meet outstanding obligations.

2. Collateral Trust Bonds

Collateral trust bonds are similar to mortgage bonds but use financial assets like stocks or bonds as collateral instead of residential properties. Businesses often use these when they don't have suitable physical assets for collateral.

3. Debenture Bonds

Debenture bonds are unsecured bonds that lack specific backing from properties or securities. Companies with strong credit ratings can issue debentures at favorable interest rates. Unlike secured bonds, debentures are backed only by the issuer creditworthiness.

4. Guaranteed Bonds

Guaranteed bonds are backed by a guarantee from a third party, usually another company. This guarantee reduces the overall risk of default, as the guarantor has committed to fulfilling the bond's obligations if the issuer cannot.

Here are some of the benefits of investing in corporate bonds:

1. Greater Returns

Corporate bonds typically have higher coupon rates than government securities. This may make it a more attractive investment option than bank deposits and government bonds. However, these rates can vary based on numerous factors.

2. Higher Liquidity

Corporate bonds offer a higher degree of liquidity compared to other fixed-income investments. Some fixed-income investments, such as Certificates of Deposits, penalise early withdrawals. You can buy and/or sell corporate bonds in the secondary market before maturity.  

3. Enhanced Security

Corporate bonds are assigned credit ratings, which can be categorised into Investment Grade and Non-investment Grade. Bonds with a rating between AAA and BBB are classified as investment grade. The others are classified as non-investment grade or junk bonds. You could choose corporate bonds with a high safety rating. This secures the capital you invest and the interest payouts you will receive.

4. Variety

Corporate bonds offer a wide range of investment options. You can choose bonds from various participating companies across industries. This allows you to select bonds that align with your investment goals and risk appetite. For example, you can choose bonds with shorter tenors for short-term investments and vice versa.

Here are some of the risks associated with corporate bonds:

1. Credit Risk

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.

2. Interest Rate Risk

Corporate bond prices are directly related to prevailing market interest rates. If interest rates rise, the value of existing bonds may fall. This may lead to potential capital losses for investors.

3. Liquidity Risk

Corporate bonds may be less liquid than government bonds or stocks. This means that it might be harder to find a buyer for corporate bonds if the demand decreases. This may force you to sell your bonds at a lower price.

Here are some pointers you could consider when purchasing corporate bonds: 

• Before investing, evaluate the company’s credit rating to check the creditworthiness of the issuing company

• Check the maturity date of the corporate bond to base your decision on your financial goals and risk tolerance

• Determine whether investing in corporate bonds is a rewarding strategy for you, depending on the anticipated return on investment

• Understand the different asset classes you could diverse your portfolio across to earn steady returns

The process for investing in corporate bonds is simple and straightforward. Follow these steps to start your investment journey today:

1. Click on the ‘Invest Now’ button on this page  

2. Upon getting redirected to the Bonds India website fill in the application form with the required details to set up an account.

3. Complete your KYC application by submitting the required details

4. Browse and select the bonds you wish to invest in

5. Choose your preferred payment method and complete the transaction

6. Confirm your bond purchase and receive investment documentation

Choose a corporate bond that meets your financial requirements. Ensure it fits your affordability criteria. You can invest in Indian corporate bonds through bond funds or brokers. To purchase corporate bonds, start your journey on Bajaj Markets.

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