Why Invest in Corporate Bonds? Benefits & Risks Explained

Corporate bonds can be viable investment options, helping you diversify your portfolio and earn steady returns in turn. However, you should understand the risk factors closely before investing. 

What Are Corporate Bonds?

Corporate bonds are debt securities that are issued by companies with the goal of raising capital from investors. You thus lend money to the issuer of the bond and in return, the company promises to repay the principal amount at maturity along with interest. 

Companies issue these bonds to raise funds for several purposes, including debt repayment, expansion of the business, working capital needs, etc. Interest payments are periodically made to bondholders, usually annually or semi-annually at a floating/fixed rate. The bond will have a specific date of maturity, when the company will return the principal amount (also known as face value) to its bondholders. 

Why Should You Invest in Corporate Bonds?

Here are some of the key reasons you should consider when investing in corporate bonds - 

• Steady Income: Corporate bonds may give you a chance to earn steady returns via interest payments. This helps you get a predictable income stream over a certain period. 
• Easily Accessible Investment: You may start investing these bonds with relatively smaller amounts, while there are diverse choices that sync with different preferences and financial objectives. 
• Diversifying the Portfolio: You can invest in corporate bonds backed by strong credit ratings, thereby ensuring a safer addition to your portfolio. It helps diversify the portfolio and insulate it from market volatility and fluctuations. 
• Better Yields: Corporate bonds usually offer higher interest rates in comparison to Government bonds to make up for the increased risks. 
• Professional Management: Corporate bond mutual funds are managed by industry professionals who make strategic decisions based on extensive research and market conditions. This is helpful if you do not have the time or expertise to manage and track investments on your own. 

Benefits of Corporate Bonds

Here are some of the key corporate bond benefits that you should know about - 

• They are excellent options if you’re looking for higher returns, since their rates are mostly better than Government bonds. 
• Coupon payments or interest payments are mostly fixed, and this helps you understand how much income you will get and the timeline for the same. It may help you balance more volatile components in the portfolio. 
• There is ample variety available in terms of maturities, including short-term bonds that mature within a few years to long-term bonds over decades. You can thus choose bonds that sync with your specific investment goals, i.e. whether you’re setting up a retirement fund or looking for quick and short-term returns. 
• Every corporate bond has a credit rating from leading agencies, helping you understand the company’s creditworthiness and the risks that are involved. You can thus choose companies with higher credit ratings (with slightly lower yields) in case you wish to lower your risks. 
• In case a company files for bankruptcy, bondholders have higher claims on assets in comparison to stock/equity holders. This means that you have higher chances of recovering some of your initial investment in such scenarios.

Also read: How Corporate Bonds Work 

Risks Associated with Corporate Bonds

Let us take a closer look at some of the risks associated with corporate bonds you need  to be aware of - 

• Credit Risk - If the issuer fails to make regular interest payments or return the principal amount at maturity.

• Liquidity Risk - Occurs when selling of the bonds before maturity is difficult due to low trading volumes.
• Interest Rate Risk - Refers to the possibility of existing bonds in the secondary market losing their appeal due revision in interest rates such as repo rate changes by the Reserve Bank of India (RBI).

• Inflation Risk - Occurs in the case of corporate bonds that offer a fixed interest rate, where a higher inflation rate can negatively affect your real returns

Who Should Consider Corporate Bonds

You could consider corporate bonds if you are looking for: 

• Investments with lower to moderate risk - These bonds are considered to have lower risks than equities. You can also choose bonds with higher credit ratings in case you are risk-averse by nature. 
• Steady income - If you’re looking for a fixed and reliable income stream via coupon payments, these bonds make for a good fit. 
• Portfolio diversification - You can smartly diversify your portfolio by opting for fixed-income components such as corporate bonds. 
• Long-term investment avenues - These bonds are often good choices for investors who have a medium to long-term horizon for their investments. 

How to Invest in Corporate Bonds in India

You can invest in corporate bonds through stock exchanges (BSE/NSE), public issues of Non-Convertible Debentures (NCDs). Here are the steps to follow -

via Public Issue of NCDs

Step 1: Check for notifications of any ongoing issues of NCDs. They can be found on the stock exchange platforms, newspapers or financial news websites.

Step 2: You can apply for the same through your broker or bank-enabled ASBA account.

Step 3: The bonds will be credited to your Demat account on allocation.

via BSE/NSE Platforms

Step 1: Ensure you have a Demat account and a trading account linked to the same with a registered stock broker

Step 2: Several corporate bonds are also listed on the stock exchange where you can buy/sell the same. The same can be found on BSE’s Bond platform and NSE’s Debt segment

You can also choose to invest in corporate bonds through online platforms/brokers that give you direct access to both primary as well as the secondary market.

Corporate Bonds vs. Other Investment Options

How do corporate bonds measure up to other investment options? If you take mutual funds into consideration, they offer comparatively higher returns, although they come with higher management fees and volatility/risks to deal with. Corporate bonds may have relatively lower risks with more predictable (albeit lower) returns in this case. Mutual funds may have more flexible sell/buy choices, while corporate bonds may only give you the same liquidity in case they are actively exchanged in the secondary market. 

Coming to stocks, you invest money to buy a portion of ownership/shareholdings in the company. In bonds, you basically lend money to the company in return for interest income. Stocks may offer comparatively higher long-term returns than corporate bonds, although the risks are substantially higher as well. Corporate bonds may be more stable than stocks, which suits conservative investors.