How to Invest in Corporate Bonds in India (For Stable Returns)

In India, investors experience a struggle to find options that deliver steady income and reduced risks. Whether it is about saving accounts offering good returns, fluctuations in the stock market, or high capital demands in real estate, everything becomes a challenge. The solution? Introducing corporate bonds!

A stable source of income, corporate bonds are all about lending money to companies in exchange for interest payments, creating an income stream. Are you also looking for opportunities to grow your wealth? Continue to read this blog to understand how corporate bonds deliver, how to invest in corporate bonds in India, the benefits, and the associated risks. So, scroll down and leverage the balance of profits and security in dynamic financial markets.

Corporate Bonds: Definition

A corporate bond is a debt security issued by a business organisation to acquire finances to support its business, growth, or refinance its debts. When you buy a corporate bond, you are actually lending money to a business over a fixed term in exchange for a certain interest payment at some given time and repayment of your principal at the end of the term.

Corporate bonds are considered fixed-income bonds, or fixed-income securities, which are equivalent to government bonds. However, they come at a higher rate to reflect the greater risk.

Investing in Corporate Bonds: Explore the Benefits

In corporate bonds, your money is working for you. It means that your money yields regular returns and protects your principal. Therefore, before understanding how to invest in corporate bonds, take a look at the advantages.

• Constant and Reliable Returns: Corporate bonds are interest-paying bonds with a constant rate of interest (coupon rate) that is paid on a periodic basis (quarterly, semi-annually, or annually). They are also best suited to investors who want predictable returns or want to preserve capital.
• Better Yields than FDs: As the current fixed deposits of the banks are paying returns around 6 percent to 7.5 percent, the current well-rated corporate bonds may be paying 8 percent to 10 percent, again depending on the issuing organisation's credit rating and market environment. The increased yield makes them especially appealing to investors seeking inflation-beating income.
• Portfolio Diversification: Corporate bonds are an excellent method to invest in bonds for returns while diversifying an investment portfolio. Incorporating fixed-income securities with equity and mutual funds, investors can minimise the general portfolio risk. Bonds serve as a stabilising element during stock market up and down periods.
• Diverse Risk and Tenure Solutions: Corporate bonds are available in varied maturity periods, either a few months or several years, and at varying credit ratings. Depending on their risk tolerance, investors have the option of investing in AAA-rated bonds (lowest risk) to lower-rated high-yield bonds (higher risk, higher return).
• Liquidity and Tradability: Most corporate long-term bond investments are traded in stock markets such as the NSE and BSE, enabling investors to acquire and sell them until their maturity date. This aspect offers liquidity when compared to FDs, which normally include fines in case of premature withdrawal.

How to Invest in Corporate Bonds in India?

Corporate bonds have become so much easier to invest in over the past years with the advent of digitalisation and the emergence of online bond marketplaces. Here is a step-by-step guide on how to invest in corporate bonds:

• Identify Your Investment Objective: Before investing, determine your target - are you interested in a regular income, capital preservation or higher returns? Example: retirees will like steady income bonds, whereas younger investors will choose longer-during or higher-yielding bonds.
• Check Credit Ratings: All the corporate bonds in India are rated with a credit rating by agencies like CRISIL, ICRA or CARE.
  • The safest ones are AAA-rated bonds and are issued by companies that are financially sound.
  • The A-rated or AA bonds are slightly higher in returns, though there is also a slight increase in risk.
  • BBB and lower ratings are riskier and can be treated with caution.
• Pick the Perfect Platform or Channel: Corporate bonds may be invested in:
  • On the Internet bond market, such as GoldenPi, BondsIndia, or Wint Wealth.
  • Stock trade (NSE/BSE) through a demat account.
  • Banks and NBFCs, which issue the bonds to retail investors.
  • Debt funds or mutual funds that invest in a collection of corporate bonds.
• Know the Tenure and Yield: Corporate bonds are issued with different maturities (short-term (1-3 years), medium-term (3-7 years), and long-term (7 10+ years)}. The longer tenure tends to yield higher. Never invest without examining the Yield to Maturity (YTM) — it is the cumulative amount that you will receive, helping you understand whether the investment should be held to maturity or not.
• Tax Implications: Interest charged on a corporate bond is taxed according to your income tax bracket. But when you sell a listed bond prior to maturity, capital gains tax can apply:
  • Short-term capital gains (STCG) - in case it is sold within 12 months, taxed at per income slab.
  • Long-term capital gains (LTCG) - taxed at 10 per cent without indexation at a holding period of more than 12 months.
  • Post-tax returns can be optimised with the help of tax-efficient planning, i.e., holding bonds until maturity or investing in debt funds.

• Diversify Across Bonds: Do not put all your money into an individual bond. Rather, diversify in terms of issuers and ratings, e.g., AAA-rated PSU bonds and high-yield bonds of the private sector, to strike a balance between risk and yield.

Risks Involved: A Closer Look

Understood how to invest in company bonds? Well, corporate bonds are safe compared to equities, but they are not without risks. Having knowledge of these risks can enable you to make sound judgments.

• Credit Risk: Corporate bond interest rate risk can be greatest because there is the likelihood of default or failure of the issuer to pay interest or repay the principal. To reduce this risk, it is better to invest in investment-grade bonds (grade A or higher).
• Interest Rate Risk: With an increase in interest rates in the market, the current bond prices fall because new bonds with higher rates are more preferable. This may impact your returns in case you want to sell bonds prior to maturity.
• Liquidity Risk: Certain corporate bonds may not be easily traded at the secondary market, particularly smaller company bonds. Therefore, select high-rated, high-trading bonds that are more liquid.
• Inflation Risk: Is inflation shooting up? The expected returns of fixed interest payments would decline in the long run. This can be reduced with bonds that have floating interest rates.

Corporate Bonds vs Mutual Funds vs Fixed Deposits: A Comparison

Conclusion

Corporate bond investment in India: They are an attractive choice to those who seek steady returns, capital protection, and diversification. Retail investors are also able to choose them without risk with credit ratings, digital investment platforms, and transparency.

By staying cautious, doing proper research, and selecting suitable issuers, tenures, and ratings, investors can use corporate bonds to build a balanced, stable, and income-generating portfolio. So, embrace the best corporate bonds India as a dependable pillar of stability to give your portfolio what it truly deserves.

My Mudra plays a key role in simplifying this investment journey. The platform helps investors compare, select, and invest in top-rated corporate bonds with ease. Through expert guidance and reliable investment options, My Mudra enables you to make informed choices that align with your financial goals.

Also Read:
- How to Buy Corporate Bonds in India
- Best Platforms to Buy Corporate Bonds Online in India (Zerodha, HDFC, and More)