How 'corporate bonds' can secure your financial future in India
What's the story
Corporate bonds are basically loans that you (the investor) give to companies, and in return, they pay you interest.
Unlike stocks, where you actually own a piece of the company, when you buy a corporate bond, you're letting the company borrow your money.
This instrument can be a good choice for Indian investors who want a regular income with less risk than equities.
Basics
What are corporate bonds?
Corporate bonds are debt securities that companies issue to raise capital for their operations, expansion, or specific projects.
When you purchase a corporate bond, the issuer (company) commits to repay your principal investment on a predetermined maturity date, along with periodic interest payments, called coupon payments.
This interest rate can be either fixed or floating, depending on the bond's terms.
Benefits
Why invest in corporate bonds?
Investing in corporate bonds provides regular income through coupon payments, potential capital appreciation if sold before maturity at higher prices, and lower risk compared to stocks.
They also diversify your investment portfolio.
However, one must remember that they come with credit risk - the risk of default by the issuer.
Evaluation
Assessing risk and returns
Corporate bonds provide interest income and the possibility for capital gains or losses stemming from market price fluctuations.
Their primary risk is credit risk, as issuers may fail to make timely interest or principal payments.
Rating agencies (CRISIL, ICRA) assign ratings to these bonds, assisting investors in assessing this risk.
While higher-rated bonds offer lower yields, they are considered safer investments with lower default risks.
Purchase process
How to buy corporate bonds?
Indian investors can buy corporate bonds either through primary issues at the time of their launch or from the secondary markets on stock exchanges such as BSE and NSE.
To buy/sell in the secondary markets, you need to have a demat and a trading account.
You should do your homework or consult with financial advisors before purchasing, keeping in mind your investment goals and risk tolerance.
Strategy
Diversifying your bond investments
The golden rule of investing in corporate bonds is diversification.
By distributing your investments among different sectors and credit ratings, you can mitigate the risks of any single issuer's default affecting your overall returns significantly.
Combine high-yield bonds with higher returns (and higher risks) with lower-yielding but more creditworthy ones for balanced exposure.