Where to Buy Corporate Bonds Online in India?
Investing in bonds is a promising way to make money with reduced risk. corporate bonds, in particular, offer higher returns than other types of bonds. They provide a conservative option for diversifying investments and offsetting riskier ventures like stocks.
This article explores corporate bonds, including what they are, factors to consider when purchasing them, where to buy them, and their significance as a diversification tool.
Understanding Corporate Bonds
Corporate bonds refer to investment instruments issued by corporates and other institutions to raise capital to run operations or for capital investment. In exchange for capital, the investor receives a pre-determined number of interest payments at a fixed rate. Once the corporate bonds mature, the investor will be paid back their principal. Unlike equity ownership, corporate bond ownership does not imply ownership in the bond-issuing company.
The bond's backing stems from the company's capacity to repay, hinting at its future revenues and profitability. In certain instances, the company may utilise its tangible assets as security.
Although some corporate bonds can be redeemed or have a call feature affecting maturity date, most are categorised into short-term, medium-term, and long-term notes. Maturity ranges from one year for short-term bonds to twelve years for long-term bonds.
The company's creditworthiness influences the categorisation of corporate bonds. A company with a low credit rating tends to pay higher interest rates on the bonds they issue and vice versa. It is worth noting that corporate bonds have a higher risk relative to government-issued bonds. As a result, their interest rates are higher even for companies having good credit ratings.
Where To Buy Corporate Bonds In India
Corporate bonds are available in the primary and secondary markets. Securities are usually created in the primary market and traded among investors in the secondary market. Investors can buy corporate bonds in the primary market when floated for the first time.
Also, investors can buy corporate bonds from secondary markets, such as India's National Stock Exchange, like stocks. Within the debt markets, bonds assure their holders of receiving the complete par value upon maturity. However, this maturity date is often distant in the future. Alternatively, bondholders can sell their bonds in the secondary market at a potential profit, notably if interest rates have declined since the bond's initial issuance.
Grip Invest, a SEBI-regulated online bond-providing platform (OBPP), curates many exchange-listed, investment-grade corporate bonds. The platform offers comprehensive details on different bonds and their issuers, helping investors with due diligence.
Factors To Consider When Buying Corporate Bonds
1. Risk Capacity
Among the most important aspects to consider when purchasing corporate bonds is the default risk involved, which refers to the risk of the company defaulting on principal payments and interest, thus defaulting on its corporate bonds.
The good news is that most investment-grade corporate bonds are from companies unlikely to default. Also, high-yield corporate bonds offer high returns but are riskier and considered speculative.
2. Security
Another important consideration when investing in corporate bonds is checking whether they are secured or unsecured. Unsecured corporate bonds are only backed by the corporation's creditworthiness, meaning bondholders rely on the issuer's promise to receive interest payments on time.
On the other hand, secured corporate bonds are backed by collateral, thus minimising risk to investors. Collateral can be equipment, property, or other company assets. This factor determines the likelihood of recouping invested funds in case of a company default or insolvency declaration.
3. Buyback Option
Corporate bonds also offer a distinctive feature known as the buyback option, which certain issuers incorporate into the bond investment terms. This provision enables the issuer to repurchase the bonds before maturity, often in response to declining interest rates or market conditions.
4. Maturity Date
The maturity date is an important aspect to consider when buying corporate bonds. Remember the investment horizon or the period one expects to hold the investment. As indicated before, there are short-term bonds (1-5 years), medium-term bonds (4-10 years), and long-term bonds (10-year + bonds) that one can consider.
5. Interest Payment
An investor should ensure that the interest rate offered by an issuer is competitive. While slight variances are likely, the interest rate should align with prevailing market rates. It is important to note that corporate bonds with interest lower than the market rate are usually available at a discounted price.
Interest payments can be categorised into four categories. The most common is a fixed rate, implying that the investor will receive a fixed monthly or quarterly payment. There are also floating-rate bonds, whereby there is a periodic reset of payments based on the market interest rate, and zero-coupon bonds until maturity. Lastly, investors can purchase convertible bonds, which can turn into shares at maturity1.
Benefits Of Corporate Bonds
1. Diversification: Building a portfolio with a balanced mix of shares, bonds, and other asset classes can help achieve a well-diversified investment strategy. Corporate bonds and stock often exhibit an inverse relationship, meaning that bonds tend to become more appealing when the stock market experiences a decline.
By diversifying across different asset classes, investors can enhance portfolio resilience and seek returns across various market environments.
2. Generating Passive Income: Corporate bonds have the potential to generate income through regular interest payments, making them an attractive option for investors seeking a predictable income stream. This mainly benefits individuals nearing retirement or those looking for fixed-income investments.
3. Preserving Capital: Capital preservation refers to safeguarding the initial investment value by choosing assets that ensure a return on capital. Corporate bonds generally carry lower risk than stocks, making them suitable for investors with a lower risk appetite.
Tips For Buying Corporate Bonds
- Bond maturity dates are important to note, as they determine when the investment will be reimbursed. Before committing funds, understand the investment duration will be locked in the bond.
- Please note the bond's rating since it indicates its creditworthiness. A lower rating indicates a higher risk of default, potentially resulting in an investment loss. In India, bond ratings range between AAA and D, with AAA being the highest-rated bond and D the least-rated, denoting the issuer's default risk.
- Conduct a thorough investigation into the bond issuer's historical performance. Understanding the company's background can aid in deciding the issuer's credibility.
- Evaluate your risk tolerance. Bonds with lower credit ratings typically offer higher yields to compensate for increased risk. Assess risk tolerance carefully and avoid making investment decisions solely based on yield.
- Consider macroeconomic risk. Bonds can lose value when interest rates rise, known as interest rate risk. However, attempting to time the market is challenging in the same ways predicting interest rate movements is uncertain. Instead, focus on your long-term investment objectives.
Conclusion
Corporate bonds offer investors an option to invest in instruments that ensure regular coupon payments and payment of their principal at the bonds' maturity. It is important to note that various aspects, such as maturity duration, interest payment, and risk, must be considered when buying corporate bonds.
Explore Grip Invest today to learn more about corporate bond investments.
References:
- The Balance <https://www.thebalancemoney.com/what-are-corporate-bonds-3305604>
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