In the dynamic world of investments, corporate bonds have emerged as a popular choice among Indian investors seeking steady returns and diversification. As companies in India increasingly turn to bonds to raise capital, understanding how these financial instruments work becomes essential for making informed investment decisions. This comprehensive guide will answer all your questions about corporate bonds, helping you navigate this promising investment avenue with confidence.
Definition of corporate bonds
Corporate bonds are debt securities issued by companies to raise capital.. Investors who purchase corporate bonds are essentially lending money to the issuing company in exchange for periodic interest payments, known as coupon payments, and the return of the bond’s face value either periodically or upon maturity.
How do corporate bonds work in India?
When a company in India issues a corporate bond, it agrees to pay the bondholder a fixed or variable interest rate over a specified period. Upon reaching the bond’s maturity date, the company repays the principal amount (repayment of principal can also be periodic over the bond term). These bonds can be traded in the secondary market, allowing investors to buy and sell them before maturity provided there are interested buyers. Liquidity is a key risk factor when investing in bonds.
Why do companies issue corporate bonds?
Companies issue corporate bonds to raise funds for various purposes, such as financing new projects, expanding operations, refinancing existing debt, or improving cash flow. Issuing bonds can be an attractive alternative to equity financing, as it allows companies to retain ownership and avoid diluting shareholders’ stakes.
Types of corporate bonds in India
There are several types of corporate bonds in India, including:
- Fixed-rate bonds: These bonds offer a fixed interest rate over the bond’s life.
- Floating-rate bonds: The interest rate on these bonds adjusts periodically based on a benchmark interest rate.
- Zero-coupon bonds: These bonds do not pay periodic interest. Instead, they are sold at a discount and pay the face value at maturity.
- Convertible bonds: These bonds can be converted into a predetermined number of shares of the issuing company.
- Callable bonds: The issuer has the right to redeem these bonds before maturity at a specified call price.
How are corporate bonds rated in India?
Credit rating agencies in India, such as CRISIL, ICRA, CARE Ratings, and India Ratings, evaluate corporate bonds and assign them ratings based on the issuer’s creditworthiness. These ratings range from investment-grade (high credit quality) to non-investment-grade or junk bonds (lower credit quality). Higher-rated bonds generally offer lower yields, reflecting lower risk, while lower-rated bonds offer higher yields to compensate for higher risk.
Benefits of investing in corporate bonds in India?
Investing in corporate bonds in India can offer several benefits:
- Steady income: Corporate bonds provide regular interest payments, making them a reliable source of income.
- Diversification: Adding corporate bonds to an investment portfolio can enhance diversification and reduce overall risk.
- Capital preservation: High-quality corporate bonds can help preserve capital while providing a predictable return.
- Potential for capital gains: Investors can sell bonds in the secondary market at a profit if bond prices rise.
What are the risks associated with corporate bonds in India?
While corporate bonds can be relatively safe, they do carry certain risks:
- Credit risk: The risk that the issuer may default on interest or principal payments.
- Interest rate risk: Bond prices can fluctuate with changes in interest rates; rising rates can lead to falling bond prices.
- Inflation risk: Inflation can erode the purchasing power of the bond’s interest payments.
- Liquidity risk: Corporate bonds may be difficult to sell quickly in the secondary market.
How to buy corporate bonds in India?
Investors can purchase corporate bonds through:
- Online bond platforms: Digital platforms like Jiraaf provide a user-friendly way to invest in corporate bonds, offering access to a curated selection of bonds with detailed information, ratings, and easy transaction processes.
- Brokerage accounts: Investors can buy bonds directly from a broker.
- Mutual Funds: Mutual funds or Exchange Traded Funds (ETFs) that invest in a diversified portfolio of corporate bonds.
- New issues: Participating in the initial offering when a company issues new bonds.
Are corporate bonds suitable for all investors in India?
Corporate bonds can be suitable for a variety of investors, particularly those seeking steady income and lower-risk investments compared to stocks. However, the suitability depends on individual risk tolerance, investment goals, and time horizon. It’s essential to evaluate the credit quality and other characteristics of the bonds before investing.
By understanding these key aspects of corporate bonds in India, investors can make informed decisions and potentially enhance their investment portfolios.
FAQs:
- Can corporate bonds lose value?
Face Value of Corporate Bonds will NOT reduce if held till maturity. If the bonds are expected to be sold before maturity, then the value of corporate bonds can be lower or higher driven by various factors. Bond prices can fluctuate due to several factors including changes to interest rates, credit rating downgrades, and changes in the issuer’s financial health. If interest rates rise, bond prices generally fall, and vice versa. Additionally, if a company’s credit rating is downgraded, the value of its bonds may decrease.
- Are corporate bonds secured or unsecured?
Corporate bonds can be either secured or unsecured. Secured bonds are backed by specific assets of the issuing company, providing bondholders with a claim on those assets in case of default. Unsecured bonds, also known as debentures, are not backed by specific assets and rely solely on the issuer’s creditworthiness. Secured bonds generally carry lower risk compared to unsecured bonds.
- Are corporate bonds taxable in India?
Yes, interest income from corporate bonds is taxable in India. The interest earned is added to the investor’s total income and taxed at the applicable income tax rate based on their tax bracket. Additionally, capital gains tax may apply if the bonds are sold before maturity at a profit. Short-Term Capital Gains Tax (STCG) and Long-Term Capital Gains Tax (LTCG) for listed bonds are 20% and 12.5% respectively. LTCG is applicable if the papers are held for more than 12 months.
