For investors seeking a balance between risk and reward, corporate bonds offer an attractive avenue within the fixed-income market. But what are corporate bonds, and how do they work in the context of bonds in India? This beginner’s guide explains the basics, benefits and strategies to help you start your journey into corporate bond investing.

Understanding Corporate Bonds

Corporate bonds are debt instruments issued by companies to raise capital for various purposes, such as expanding operations, funding acquisitions, or refinancing debt. When you invest in a corporate bond, you lend money to the company in exchange for periodic interest payments (coupons) and the return of the principal amount at the bond’s maturity.

These bonds represent a form of borrowing for companies and an investment opportunity for individuals seeking predictable returns with a defined timeline.

How Do Corporate Bonds Work?

Corporate bonds operate on a straightforward principle:

1. Issuance: A company issues bonds to raise funds. Each bond has a face value, a fixed or floating interest rate and a maturity date.
2. Investment: Investors purchase these bonds, effectively lending money to the company.
3. Interest Payments: The company pays regular interest (usually semi-annually or annually) to bondholders.
4. Maturity: Upon maturity, the company repays the principal amount to bondholders.

Types of Corporate Bonds in India

1. Secured Bonds
   Backed by collateral, these bonds are considered safer as the issuer pledges assets to secure the borrowing.
2. Unsecured Bonds
   These bonds do not have collateral backing, making them riskier but often offering higher yields.
3. Convertible Bonds
   These bonds can be converted into equity shares at a predefined price, providing an option for potential capital gains.
4. Perpetual Bonds
   These bonds do not have a maturity date and pay interest indefinitely, often used by banks and financial institutions.

Benefits of Investing in Corporate Bonds

1. Steady Income
   Corporate bonds offer regular interest payments, providing a predictable income stream for investors.
2. Higher Returns
   Compared to government securities or fixed deposits, corporate bonds often offer higher yields, especially for bonds with lower credit ratings.
3. Portfolio Diversification
   Adding corporate bonds to your portfolio reduces overall risk, as they are generally less volatile than equities.
4. Customizable Options
   With varying tenures, interest rates and risk levels, corporate bonds provide flexibility to match diverse investment goals.
5. Tradability
   Many corporate bonds in India are listed on stock exchanges, enabling investors to buy or sell them in the secondary market.

Risks to Consider

1. Credit Risk
   The issuer’s ability to meet interest and principal payments is a key factor. Bonds with lower credit ratings carry a higher risk of default.
2. Interest Rate Risk
   Bond prices are sensitive to changes in interest rates. Rising rates may lead to a decline in bond prices.
3. Liquidity Risk
   Some corporate bonds may not have active buyers in the secondary market, making it difficult to exit before maturity.

Why Corporate Bonds Are Important in India

Corporate bonds play a significant role in the growth of India’s financial markets. They provide companies with a cost-effective way to raise funds while offering investors a medium-risk, medium-return alternative to equity and government bonds. As the demand for infrastructure, technology and business expansion rises in India, corporate bonds serve as a bridge between institutional investors, retail investors and companies seeking capital.

How to Start Investing in Corporate Bonds in India

1. Through Primary Markets
   Companies issue bonds through public offerings, which can be subscribed to during the issuance period.
2. Secondary Markets
   Investors can trade corporate bonds on stock exchanges like NSE and BSE.
3. Online Bond Platforms
   SEBI regulated digital platforms like IndiaBonds have made it easier for retail investors to access bonds in India, including both public issues and secondary bonds, providing user-friendly interfaces and expert insights for investors.

Conclusion

Corporate bonds are an excellent starting point for those new to the fixed-income market. They offer a balance of stability, higher returns than traditional savings instruments and the opportunity to diversify your investment portfolio. Understanding what are corporate bonds and how they operate is the first step to making informed decisions in the world of bonds in India. Whether you’re a seasoned investor or just starting, corporate bonds can be a valuable addition to your financial journey.