Financial advisors and money managers talk a lot about asset like mutual funds, bank deposits, equity, gold, real estate etc. However, not much is being talked about debt instruments, specifically, corporate bonds. Retail investors’ participation in bond markets is relatively low in our country, partially due to a lack of awareness about corporate bond features and how to invest in them.
This article will cover these aspects of corporate bonds as to what they are and their features as an asset class in India.
What are corporate bonds?
Corporate bonds are a medium to raise money by the government, government-owned companies, and private and public limited companies in India. The bonds issued by the government (central or state) are called Government Securities (G-Secs). Likewise, the bonds issued by private and public limited companies to raise capital from investors are known as corporate bonds.
Why do companies issue bonds?
Business, especially in the manufacturing sector, is capital intensive and requires a large amount of money for working capital management or expansion. Companies can either approach the banks for commercial loans or get listed in stock markets to raise capital. Another route is to issue bonds, pay regular interest, and return the borrowed amount at maturity.
Corporate bonds features: All you need to know
This section will highlight the corporate bond pros and cons to give a 360-degrees view to the investors of these bonds.
- Better returns than bank deposits: Corporate bonds usually have higher coupon rates (interest rate) than fixed or recurring deposits rates offered by banks. These bonds also offer higher coupon rates than G-Secs.
- No lock-in period: This is one of the corporate bond features that makes it stand out from other asset classes. These bonds are tradable; thus, you can sell them in the secondary markets, unlike a fixed deposit or sovereign gold bonds that come with a lock-in period.
- Liquidity: Liquidity is the ease or difficulty in converting an asset into another asset, primarily cash. Corporate bonds come with moderate liquidity.
- Credit rating: A credit rating is assigned to the bond-issuing company and the bonds issued by it. These ratings start from AAA and go on till C and D, where AAA is the best rating and as we move towards D rating, the risk increases. These ratings are given by credit rating agencies in India.
- Callable bond: Some corporate bonds come with a callable feature, through which the company can buy back the bonds before their maturity.
We hope that by now, you have a better understanding of corporate bond features and how they work. Depending on your financial goals and current investment portfolio, it could be a good idea to consider investing in bonds. To know more about whether you should include them in your portfolio, you can also consult a financial expert.