New to the World of Corporate Bonds? All that You Need to Know

Corporate Bonds are getting very popular among investors who want lower risk but higher returns potential. If your criteria for selecting an instrument for investment are similar, the bonds can be a worthy option for you.

Increasing number of investors in India are now investing in bonds issued by corporations. They have turned into a go-to option for a lot of investors with lower risk appetite but higher return expectation. As the interest rates have remained lower for quite some time now, many of these bonds have fared better than expected.

If you too want to invest in these bonds, the information mentioned below will make it easier for you to understand them.

What are Corporate Bonds?

In simple words, Corporate Bonds are issued by corporations for funding their operations. For instance, if a company wants to raise money, they usually have two different options- to get listed at an exchange and issue stocks or take debt by issuing bonds.

When you buy a bond, you are lending money to the company which gives you an IOU (I Owe You) in return. This IOU comes with a term, and you receive the invested sum in full after maturity which can be 5 or 10 years. There is also a coupon attached to the bond which is the interest that you’ll receive each year.

For instance, if you have invested Rs. 1 lakh in a corporate bond for 5 years and the interest coupon is 5%, you’ll receive Rs. 5000 every year and the initial investment of Rs. 1 lakh will be returned upon maturity.

How are Corporate Bonds Rated?

Corporate Bonds are rated by a number of rating agencies like CRISIL, CARE, ICRA, S&P, etc. These agencies review the financial stability, growth potential and current debt or the company before their bonds are rated. The rating ranges of AAA to D. The bonds which are rated below BBB are considered as risky investments with AAA being the most reliable ones.

A diversified portfolio should have a good blend of top-rated bonds which have long-term, mid-term, and short-term maturity. No matter if your investment objective is retirement planning, buying a car, or vacation, Corporate Bonds can be a great investment opportunity.

How to Invest in Corporate Bonds?

In India, there are two different ways in which you can invest in such bonds. You can either buy them directly from a broker or can invest in a mutual fund or ETF (Exchange Traded Fund) which invests or focuses on such bonds.

Many of such bonds are traded OTC (Over-The-Counter) and offer excellent liquidity. This means that even if the maturity of a bond is five years, you can sell it at an exchange if its value rises.

If you want to create a diversified portfolio, top-rated Corporate Bonds or funds which invest in them should surely be a part of your portfolio. While the bonds are never entirely free from risk, top-rated bonds usually assure a reliable and sturdy stream of income throughout the bond’s life.