Amidst the constant ebb and flow of the capital markets, the allure of stable and good fixed-income investment products has always been cherished in everyone's portfolio.
And why wouldn't it?
They offer the comfort of consistent returns, safety, tax advantages, diversification, and so on!
Nonetheless, within this dynamic financial landscape, investors are usually on the brink of finding the right opportunities where expectations meet reality.
Against this backdrop, we are delighted to introduce a remarkable addition to the FYERS platform – Corporate Bonds!
So, if you're looking for higher returns than traditional investment options like Fixed Deposits while mitigating stock risks. Corporate bonds may be the right fit for your portfolio.
Curious to know more about corporate bonds?
In this blog post, let's explore the nuances of corporate bonds, an investment possibility that harmonizes stability with growth.
What are corporate bonds?
Corporate bonds are debt instruments issued by public and private corporations to borrow capital for various purposes, such as the construction of business facilities, purchase of equipment, business expansion, innovation, and meeting day-to-day expenses. When you invest in a bond, you lend money to the issuing company in exchange for a return in the form of interest on the amount loaned. Corporate bonds come with a fixed maturity period, coupon rate, and ratings.
How are Corporate Bonds rated?
Independent agencies such as CRISIL, ICRA, and CARE rate corporate bonds in India based on their financial health and creditworthiness. The ratings range from AAA (highest) to D (lowest) and reflect the issuer's ability and willingness to pay interest and principal on time. Higher-rated bonds are less risky and offer a lower interest rate, and vice versa. For instance, there is a bond named L&T Infrastructure Finance Company Ltd with a rating of AAA. This rating indicates that the bond is safe, depicting a higher probability of timely interest payment and principal amount at maturity.
The ratings also have modifiers such as + or - to indicate their relative position within a rating category. For instance, AA+ ranks higher than AA but falls short of AAA.
What are the pros and cons of investing in Corporate Bonds?
Before you start investing in corporate bonds, it is essential to know the advantages and disadvantages compared to other investment options:
Pros
Consistent Income
Corporate bonds provide a steady source of income. As per a bond's applicable terms and conditions, interest is credited regularly. The interest payments are fixed and do not vary much with market fluctuations.
Higher Returns
Corporate bonds offer higher interest rates than bank FDs, government securities, and other debt instruments. The interest range could be as high as 13% per annum, whereas FDs offer 7-8% per annum.
Low Volatility
Corporate bonds are relatively less volatile than stocks. As the exposure to market fluctuations is less, they are considered safe and secure investment options in times of uncertainty.
Risk Management
As the approved set of corporate bonds comes with ratings, it helps investors gauge their risk appetite and choose an option that reduces the overall risk.
Liquidity
Corporate bonds are traded in secondary markets, which gives investors the flexibility to sell their bonds before maturity if needed.
Cons
Credit Risk
Corporate bonds carry the risk of default or delay in payment by the issuer due to financial distress or bankruptcy. This can result in a loss of principal and interest for investors. Credit risk is higher for unsecured and lower-rated bonds than secured and higher-rated.
Interest Rate Risk
Corporate bonds are sensitive to changes in interest rates in the economy. When interest rate rises, bond prices fall, and vice versa. Investors demand higher returns for holding bonds when interest rates are high and lower returns when interest rates are low. Long-term and lower-coupon bonds are more sensitive to changes in interest rates than shorter-term and higher-coupon bonds.
Inflation Risk
Corporate bonds are exposed to inflation risk, which is the loss of purchasing power due to rising prices in the economy. Inflation reduces the real value of the bond's interest and principal payments. Inflation risk tends to be greater for longer-term and fixed-rate bonds compared to shorter-term and floating-rate bonds.
What are the tax implications on corporate bonds?
The tax treatment would be different for the interest income and capital gains.
Interest Income – The interest income from corporate bonds will be taxed as per the applicable individual slab rates under 'Income from other sources.' However, certain corporate bonds issued by PSUs and infrastructure companies are tax-free, meaning that interest income from such bonds will be exempt from tax.
Capital gains- The tax treatment depends upon the type of bond(listed/Unlisted) and holding period. Listed bonds are categorized as long-term when held for more than 12 months, whereas unlisted bonds are considered long-term after a 36-month holding period. Short-term capital gains from listed and unlisted are taxed at the applicable individual slab rate. In contrast, long-term capital gains on listed bonds are taxed at 10% without indexation, and unlisted bonds are taxed 20%.
How much do you recover in the event of default?
The recovery rate for corporate bonds in India depends on several factors, such as the type and seniority of the bond, the issuer's credit rating, and the macroeconomic conditions.
The recovery rate refers to the percentage of the bond's total value that can be recovered in the event of default. For instance, if you have invested ₹1,00,000 in a bond with a recovery rate of 20%, meaning that ₹20,000 will be paid if the bond defaults.
Higher-rated bonds like AAA have higher recovery rates and vice versa. This is because, in case of default on a high-security bond, earmarked collaterals will be used to settle the obligations.
How do you invest in Corporate Bonds in India via FYERS?
Buying corporate bonds via the FYERS platform is as simple as purchasing online from Flipkart or Amazon. So, if you're interested in investing in corporate bonds, you have two available choices:
Primary Market
The primary market, also known as the issue market, provides a direct channel to submit applications to bond issuers. Within the FYERS platform, you can participate in corporate bonds by clicking here. To know more about the process, check out the GIF below:
The bonds will be allocated based on the total number of bids received.
Secondary Market
You can also buy corporate bonds from the secondary market, which are traded after the bonds are issued. You can buy and sell corporate bonds through the FYERS trading platform.
Conclusion
Corporate Bonds represent a vital component of the financial landscape, offering consistent income, higher returns, diversification, and risk management opportunities.
However, it's crucial to remain mindful of associated risks, including credit, interest rate, and inflation risks, while also understanding the tax implications and potential recovery rates in case of default.
So, are you ready to explore the world of corporate bonds?
Take the first step today and open an account with FYERS to start investing in these promising opportunities. Your financial journey begins here!
FAQ
How much interest do corporate bonds provide?
Corporate bonds provide higher interest rates than fixed income instruments. Typically, you can expect returns from 7% to 12 % per annum from corporate bonds.
What happens at the time of maturity of the bond?
At maturity, the principal amount is repaid at the face value of the bond. You will also receive the interest amount if you have chosen cumulative interest payment. In the case of periodic interest payments, you will receive only the principal invested at maturity.
What is the tenure of a corporate bond?
The tenure of corporate bonds is usually between 1-4 years.
What is the minimum investment for corporate bonds?
The minimum investment for corporate bonds is around ₹1000. However, the amount might vary depending on the bond issuers.
Can you pledge corporate bonds?
Yes, pledging of corporate bonds is allowed via the FYERS platform.