Corporate bonds represent a significant opportunity for investors seeking regular income with moderate risk. These debt
securities offer a middle ground between the safety of government bonds and the potential returns of equities. If you're
wondering how to invest in corporate bonds, read this comprehensive guide.
Corporate bond
A corporate bond is essentially a loan that investors make to companies. When you purchase a corporate bond, you're
lending money to the issuing corporation in exchange for regular interest payments and the return of your principal at
maturity. Unlike shareholders, who own a portion of the company, bondholders are creditors with priority claims on the
company's assets in the event of financial difficulties.
Corporate bonds in India are available to various investor categories, including retail investors, high-net-worth
individuals, institutional investors like banks and mutual funds, and foreign portfolio investors. Their accessibility
makes them suitable for a wide range of investment portfolios, regardless of their size.
Buying and selling of corporate bonds
In this section, you will explore how to purchase corporate bonds. The process involves several straightforward steps.
First, conduct thorough research on available bonds, examining the issuer's financial health, credit ratings, yield, and
maturity period. Next, select a broker that offers bond trading services—many stockbrokers provide this facility. If you
don't already have one, you'll need to open a trading account with your chosen broker.
Once your account is active, order your selected bond through the broker. After purchase, you can either hold the bond
until maturity to receive regular interest payments and the principal amount or trade it in the secondary market if your
investment goals change.
The secondary market for corporate bonds enables investors to sell their holdings prior to maturity. However, it's
essential to note that bond prices fluctuate in response to interest rate changes, potentially resulting in capital
gains or losses if the bond is sold before maturity.
Key characteristics of corporate bonds
Corporate bonds have several distinct features that investors should be aware of. Credit ratings are perhaps the most
crucial characteristic, calculated using financial stability, current debt, and growth potential. Standard & Poor's,
Moody's, and Fitch assign these ratings, with grades from AAA or Aaa to BBB or Baa considered investment grade. These
bonds are deemed safer investments with lower default risk.
Bonds rated BB or Ba and below, including unrated ones, are classified as junk bonds. While offering higher yields, they
carry greater default risk due to issuers' potential liquidity issues. This risk-reward tradeoff is fundamental to bond
investing.
Another key characteristic is the bond's term or maturity period. Longer-term bonds typically offer higher interest
rates to compensate for increased uncertainty about the issuer's future financial condition. Some bonds are callable or
redeemable, meaning the issuing company can redeem them before maturity, usually by paying investors a cash premium.
Corporate bonds come in various types, including mortgage bonds, collateral trust bonds, debenture bonds, and guaranteed
bonds. Each type offers different security features and risk profiles, catering to various investor preferences. If
you're wondering how to purchase corporate bonds, understanding these variations is crucial for making informed
decisions.
Corporate bond prices and interest payments
Bond prices and interest rates share an inverse relationship—when interest rates rise, bond prices fall, and vice versa.
This occurs because existing bonds become less attractive compared to new issues when interest rates increase. These
price fluctuations matter less for investors holding bonds to maturity since they'll receive the full face value
regardless of interim market conditions. However, prices can fluctuate rapidly in response to changing market
conditions.
Interest payments on corporate bonds usually occur semi-annually, creating a predictable income stream for investors.
The frequency of these payments is a crucial consideration when planning your cash flow from your investment portfolio.
Bonds with lower risk typically pay lower interest rates, while higher-risk bonds offer greater potential returns to
compensate investors for additional risk exposure.
The taxation of bond interest is another important consideration for Indian investors. Understanding the tax
implications of your bond investments can significantly impact your overall returns and should be considered when making
investment decisions.
Ways to invest in corporate bonds
There are several approaches to investing in corporate bonds, each with distinct advantages. Direct purchase through a
broker gives investors control over their specific bond selection, but it requires more research and potentially higher
minimum investment amounts. For those wondering how to buy corporate bonds, this direct approach offers maximum
customisation.
Bond mutual funds offer professional management and instant diversification across a wide range of bonds. These funds
facilitate the reinvestment of interest and principal payments, thereby simplifying the process for investors. However,
they charge management fees that can impact overall returns.
Exchange-traded funds (ETFs) tracking bond indices offer diversification with the added benefit of intraday liquidity,
as they trade on stock exchanges like shares. These instruments expose corporate bonds with lower minimum investments
than direct purchases.
Online platforms have emerged as convenient channels for investing in corporate bonds. These platforms streamline the
process with user-friendly interfaces and often provide educational resources for novice investors.
Investors can also participate in new bond issues, similar to initial public offerings (IPOs) for stocks. These primary
market offerings sometimes provide attractive initial terms, though they require timely action when opportunities arise.
Understanding the unique advantages of these different investment vehicles helps answer the question of how to invest in
corporate bonds by providing options suited to various investor profiles and goals.
Strategies for investing in corporate bonds
Several proven strategies can enhance the outcomes of corporate bond investments. The ladder strategy involves buying
bonds with staggered maturity dates, providing regular reinvestment opportunities while managing interest rate risk. For
example, with ₹500,000, you might invest ₹100,000 each in bonds maturing in 1, 2, 3, 4, and 5 years, creating annual
reinvestment opportunities.
The barbell strategy concentrates investments in short-term and long-term bonds while avoiding medium-term bonds. This
approach balances liquidity and yield, potentially optimising returns across different interest rate environments.
Diversification across sectors and companies reduces issuer-specific risk. By spreading investments across various
industries and credit qualities, investors can mitigate the impact of problems with any single issuer.
Credit quality focus involves selecting bonds based primarily on their ratings. Conservative investors might prioritise
higher-rated bonds despite lower yields, while those with higher risk tolerance might include some lower-rated bonds for
enhanced returns.
Yield hunting directly targets bonds that offer higher interest rates, although this typically involves accepting
additional risk. This strategy is most effective when combined with thorough research on the issuer.
The hold-to-maturity approach disregards interim price fluctuations, instead focusing on consistent interest income and
the return of principal at maturity. This strategy eliminates market timing concerns but requires patience and
commitment to the investment timeline.
Also Read: What is Savings Bond and how does it work?
Conclusion
Corporate bonds provide a compelling investment option for those seeking a steady income with moderate risk.
Understanding how I buy corporate bonds is just the beginning—successful bond investing requires knowledge of bond
characteristics, valuation principles, and strategic approaches. Whether you purchase individual bonds, invest through
funds, or use ETFs, the key lies in aligning your bond portfolio with your broader financial objectives.
Before investing, consider factors including credit ratings, yields, issuer financials, and bond features. Market
conditions and your investment horizon should also influence your decisions. By implementing effective strategies, such
as laddering or barbelling, and understanding how to purchase corporate bonds efficiently, you can construct a bond
portfolio that generates steady income while mitigating various risks.
With their higher yields relative to government securities, potential for portfolio diversification, and priority claims
in case of issuer financial difficulties, corporate bonds deserve consideration in most investment portfolios. The
combination of regular interest payments and capital preservation makes them particularly valuable for income-focused
investors. By applying the knowledge and strategies outlined in this guide, you can approach corporate bond investments
with confidence as part of your broader financial planning.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not
necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be
responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based
on the contents and information. Please consult your financial advisor before making any financial decision.
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