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CORPORATE BOND FUND

Introduction:

Corporate bonds are a form of debt security sold to investors by corporations that want to raise finance for their operations. Repayment is made in full principal or interest earned over some time.
In simple terms, if you purchase this type of bond, you are loaning the amount to the corporation for its operation. These bonds are different from stocks. They are legal contracts that bind the corporation to repay the borrowed money to you with interest at fixed intervals. Usually, corporate bonds offer a higher rate of interest than government bonds.

Benefits of investing in a corporate bond

If you are wondering about the benefits of this type of bond, we’ve got you covered. Here’s why you should invest in a corporate bond fund:

  1. Higher interest: Corporate bonds usually have a higher interest rate compared to government bonds. It makes for a good investment if you are looking for higher rewards.
  2. Low risk: Before making any investment, you must gauge the risk that the investment entails. Corporate bonds in India, for that matter, are less at risk. These bonds are not too affected by inflation.
  3. Quick rewards: These bonds are generally short-term investments. You are likely to reap the benefits of your investment within a short time.

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Types of corporate bonds

Corporate bonds in India are primarily of two kinds—Convertible and Non-convertible.

  • Convertible bonds: You can convert these bonds into predefined stocks at your disposal. So if at any point in time, you feel that stocks are likely to give you better returns than bonds, you can convert them into shares.
  • Non-convertible: As the name suggests, these bonds cannot be converted into stocks. These will be plain bonds purchased from a corporation for some time.

Why Do Corporations Sell Bonds


Corporate bonds are debt instruments, released in the market to raise capital from investors. Like issuing stocks, debt financing is also typical for firms. Debt funds are usually cheaper and don’t entail selling of ownership stake. Companies issue debt bonds to get ready cash to meet an immediate capital requirement or for financing new projects.

However, to issue corporate bonds, the company must demonstrate strong financials. Corporate bonds receive ratings from credit agencies based on factors like creditworthiness, business performance, track record, and more. Lenders compare the ratings before buying these bonds.

Between Corporate Bonds, Stocks, And Government Securities


Stocks and bonds are a couple of options available to investors in India. Stock investment is a popular way, wherein companies sell partial ownership of the company to general investors. When it comes to bond investment, investors have quite a few choices like corporate bonds, G-sec bonds, sovereign gold bond, capital gain bonds, and more.

Stocks and bonds both cater to different segments of customers. Corporate bonds are issued by a for-profit organisation and offer a higher rate of return. On the other hand, G-sec bonds carry an assurance of payment by the government. When you are investing, it is vital to know the differences between the different investment instruments available to create a portfolio that would generate returns in any market condition.

How can I invest in corporate bonds in India


Corporate bonds offer steady income from investment at a rate which is usually higher than the government of India bonds, hence, suitable for portfolio diversification. You can invest in these bonds through a broker or from the exchange where they list all the corporate bonds available for investment. The max cap for these bonds is Rs 2 lakh.

These bonds create passive income for the investor and become payable on maturity.

How corporate bonds are sold

The Indian bourses list all the corporate bonds available for trading.

  • Corporations issue these bonds at face value or par value, following a standard coupon payment structure.
  • Companies list their bonds with the help of an investment bank, which underwrites and sells to the investors.
  • These bonds make regular interest payments until maturity. The interest payment can be a fixed rate or floating that vary with a market indicator.
  • Upon maturity, investors can redeem their bonds at face value.
  • Sometimes, these bonds have a call provision that allows early repayment if the interest changes dramatically. The company would recall the old bonds and issue new ones when it is profitable.
  • Investors can trade company bonds in the secondary market. However, the bond price in the secondary market is decided by the number of interest instalments still due before the bond’s maturity date. In this case, the investor may receive less than the face value of the bond.
  • Besides direct investment, investors can get exposure to corporate bonds through specially designed mutual funds and ETFs investment.
  • Conclusion (CTA):

    Corporate bonds are a low-risk investment if you are looking for a short-term investment tool. They offer higher returns compared to government bonds. Before you invest in a corporate bond fund, weigh the risks carefully.

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