Looking for steady returns beyond regular options in India? Corporate bonds let you lend money to companies. More Indians are now interested in them. This guide will help you understand how to invest in corporate bonds smartly.
Corporate bonds are like loans you give to companies. They have a few key parts:
- Principal: The original amount you lend.
- Coupon Rate: The interest the company pays you.
- Maturity Date: When the company returns your principal. (Source: SEBI Regulations for Bond Issuance) Different companies and financial firms (NBFCs) issue these bonds.
- When a company needs money, it can issue bonds.
- As an investor, you get regular interest payments.
- In the end, you get your original money back.
- You can also buy and sell these bonds on the market after they are issued.
Benefits of Investing in Corporate Bonds in India
Corporate bonds can potentially give you better returns than traditional options like bank fixed deposits (FDs). However, higher returns usually mean taking on more risk. You receive interest regularly, providing a steady income. This can be good for retirees or those wanting regular cash flow. Adding corporate bonds to your investments can make your overall portfolio less risky, as they don’t always move in the same way as stocks. You can often sell your bonds before they mature on exchanges or online platforms. Online Bond Platform Providers (OBPPs) help with this. Generally, the prices of corporate bonds don’t change as much as stock prices.
Risks Associated with Investing in Corporate Bonds in India
Credit Risk: The company might not be able to pay you back the interest or the original amount. Credit ratings (like AAA, AA, etc.) show how likely this is. Agencies like CRISIL, ICRA, and CARE provide these ratings in India.
Interest Rate Risk: If interest rates in the market go up, the value of your existing bonds might go down.
Liquidity Risk: You might find it hard to sell your bonds quickly at the price you want if not many people are trading them.
Inflation Risk: If the prices of things you buy go up a lot (inflation), the money your bonds give you might not be worth as much in real terms.
Reinvestment Risk: When your bond matures or pays interest, you might have to reinvest that money at a lower interest rate.
How to Invest in Corporate Bonds in India?
Think about what you want to achieve with your investments and how much risk you are comfortable with. Some investors are careful, while others are willing to take more chances. You can invest in different ways:
- Online Bond Platform Providers (OBPPs): These make it easy to buy and sell bonds online with clear information and often no extra fees.
- Stock Exchanges (NSE, BSE): You can buy and sell bonds through brokers registered with these exchanges.
- Primary Market: You can buy new bonds directly when companies issue them
- OBPPs are registered with SEBI, follow rules for knowing their customers (KYC), and show you lists of available bonds.
Steps to Invest:
- Complete your KYC process.
- Look at the available bonds, checking the company, its rating, the interest rate, and when it matures.
- Read the detailed information about the bond.
- Place your order to buy.
- The process of transferring the bond to you is called settlement.
- Your bonds will be held in an electronic account called a Demat account.
When choosing bonds, look at:
- Credit Ratings: A key sign of how likely the company is to repay.
- Issuer’s Financial Health: How stable and profitable the company is.
- Coupon Rate and Yield to Maturity (YTM): The actual return you can expect.
- Maturity Period: How long you need to wait to get your principal back.
Taxation of Corporate Bonds in India
The interest you earn is taxed based on your income tax slab. If you sell your bonds for a profit (capital gains):
- Short-term (held less than 3 years): Taxed according to your income tax slab. (Source: Taxation of Short-Term Capital Gains)
- Long-term (held more than 3 years): Taxed at 10% without considering inflation. (Source: Taxation of Long-Term Capital Gains on Debt Instruments)
Who Should Invest in Corporate Bonds in India?
- People who want a regular income.
- Those who want to spread their investments across different types of assets.
- Investors who are comfortable with a moderate level of risk.
- People plan for financial goals that are far in the future.
- Cautious investors who prefer bonds with high credit ratings.
Conclusion
Corporate bonds in India can offer good returns and regular income, but they also come with risks. It’s important to do your research and understand how much risk you can handle. Consider adding corporate bonds to your investment mix. Explore trusted platforms and always be careful before investing.
Also Read: Why Invest in Australian Dividend Stocks?
