Corporate Bonds: Complete Details

Is corporate bond a good investment option? Let’s know about them.

Contents

  • Meaning
  • Who should invest in corporate bonds ?
  • Types of corporate bonds
  • Benefits of corporate bonds
  • How to invest in corporate bonds

 

What are Corporate Bonds ?

 

A corporate bond is a type of debt security that is issued by a firm and sold to investors. When the bond expires, or “reaches maturity,” the payments cease and the original investment is returned with interest.

 

A corporate bond fund is essentially a mutual fund that invests more than 80% of its total financial resources in corporate bonds.

 

Who Should Invest in Corporate Bonds?

Corporate bond mutual funds have lower risk sensitivity as it is a debt instrument ensuring capital protection. It is ideal for risk-averse people looking for high returns on their investments. 

 

Types of corporate bond funds

There are broadly two types of corporate bond a mutual fund invests in –

  1. Top-rated companies which have incredibly high CRISIL credit ratings. These are generally top public sector companies and Navratnas.
  2. Companies having a slightly lower credit rating of AA-

In case you are not satisfied with lower interest rates on bank FDs and ready to invest with higher risk, you can go for corporate bonds or their deposits. Interest offered on corporate FDs and NCDs depend on the credit rating and the credibility they have in the market but is more than bank FDs.

At times NCDs have options to “double your money” like Muthoot Finance Ltd NCD issued in May 2019 doubled the money in 90 months.

PNB Housing Finance Ltd. a “AA” rated company Offers 6.7% for 120 months deposit. At this rate your money would double in 10+ years.

Are corporate bonds a good investment ?

Features and benefits of corporate bond funds

The main advantages of investing in corporate bond funds are –

1. Higher returns

Corporate bond funds ensure significantly higher returns than other debt instruments in the market. Average yields of 8-10% can be expected from corporate debt instruments, while government-held bonds only provide approximately half of it.

2. Liquidity

Since corporate debt funds are generated to satisfy the short term financing requirements of a business, they too are short term in nature. Also, corporate bond mutual funds can be obtained and sold as per the wish of the investor. This provides high liquidity of the financial resource, allowing a person to convert it to cash as and when the need arises.

3. Security 

Corporate debt funds have a lower associated risk than shares, as the former poses a financial obligation (liability) on the company. Equity investments, on the other hand, are subject to the profits and losses generated by a company in one financial year, and thus, are relatively riskier.

4. Variety

Top corporate bond funds can be distinguished on the basis of fund tenure, as well as the credit ratings of the companies chosen for the development of the mutual fund portfolio. This distinction caters to different types of investors and their investing patterns in the market. For example, individuals looking for a short term investment opportunity in low-risk bonds can easily choose those who have a shorter maturity tenure. There are short-, medium- and long-term bonds, and there are also some perpetual bonds in the market.

If you want to buy corporate bonds or want to know about other investment options, contact us at 9460825477 (Gunjan Kataria)