How to invest in corporate bonds in India

Corporate bonds are issued by companies. Issuing bonds is another way for companies to gain access to cash without diluting their ownership by issuing more shares or going to a traditional lender and getting a loan. Bond issues may be publicly or privately traded.

Companies can use the money from selling bonds for a variety of reasons, such as acquiring new assets or facilities, investing in research and development (R&D), refinancing, financing mergers and acquisitions (M&A), or even financing stock buybacks.

As mentioned above, a corporate bond is similar to an IOU. The company promises to pay the face value on a certain date plus interest at regular intervals throughout the year to the lender or investor who buys the bond.

An alternative to investing in individual corporate bonds is to invest in a professionally managed bond fund or index fund. This is a passive fund that is tied to the average price of a basket of bonds.

How Does The Bond Market Work?

The bond market, also known as the debt market or the fixed income market, plays an important role in our economy, providing an opportunity for companies and governments to raise money and for Investors make money while managing risk. A financial market is where investors can buy and sell bonds issued by a company or government. The market price of a bond is determined by several factors, such as the issuer's interest rate, the term of the bond and market conditions.

Understanding the relationship between bond prices and interest rates is crucial in the bond market. Bond prices decrease when interest rates increase. On the flip side, bond prices go up when interest rates decrease.

Types of Corporate Bonds

There are various types of corporate bonds in India.

Convertible Bonds: You can change these bonds for the pre-selected stocks of the publishing company as you wish. You can convert these bonds into stocks if you think they will give you better returns than bonds.

Non-convertible Bonds:It is not possible to swap these bonds for the issuer's stocks. These bonds will continue to be held until they reach their maturity date.

Type One Bonds: These corporate holdings include public sector units (PSUs), banks, and high-tech companies.

Type Two Bonds:These bonds include companies with low ratings such as 'AA-' and below. These firms allocate a small portion of their portfolios to low-income companies.Therefore, they always suffer from low returns due to default.

Short Term Maturity Bonds: These bonds have a maturity of less than one year.

Medium Term Maturity Bonds: The maturity of these bonds ranges from 1 to 5 years.

Long Term Maturity Bonds: The duration of these bonds exceeds 5 years.

Fixed Rate Bonds: These bonds come with fixed coupon payments or an annual interest rate.

Floating Rate Bonds: These bonds come with a coupon that can be adjusted. It is reset regularly in accordance with the benchmark rate.

Zero-coupon Bonds: There is no interest paid on these bonds. These companies offer zero coupon bonds below face value when initially issuing them.

How To Buy Corporate Bonds in India? 

Corporate bonds are issued by companies to investors in order to gather funds, as indicated by their name. A corporate bond is initially sold in the primary market and later traded in the secondary market, where it is available for purchase. The bond's value and yield are influenced by factors such as demand and supply, current interest rates, and liquidity.

There are two types of corporate bonds: 

Based on maturity

Based on coupon 

While perpetual bonds, long-term bonds, and short-term bonds are based on maturity, coupon-based bonds include zero-coupon bonds and fixed-rate bonds. Before investing in corporate bonds, research the company and its fundamentals. Look at your finances and you'll want to invest in solid, financially sound corporate bonds. If you want to invest in corporate bonds, you must have a Demat account where the purchased bonds are deposited after purchase.

FAQs

Q. Can I buy corporate bonds in India?

A. You can invest in corporate bonds through coin.zerodha.com/corporatebonds/invest. The maximum order value for corporate bonds is Rs 2 lacs per transaction. Each of these columns next to the Bond name explains: Tenure: The number of months left until the maturity of the bond.

Q. Can I invest directly in corporate bonds?

A. How to buy corporate bonds. You can directly invest in corporate debt or through a specialist corporate bond fund or exchange-traded fund (ETF).

Q. Do corporate bonds pay income?

A. Corporates have the potential to provide attractive income. Most corporate bonds pay on a fixed semiannual schedule. One exception is zero-coupon bonds, which do not pay interest but are sold at a deep discount and then redeemed for full face value at maturity.

Q. Do corporate bonds pay monthly?

A. The most common form of corporate bond is one that has a stated coupon that remains fixed throughout the bond's life. It represents the annual interest rate, usually paid in two installments every six months, although some bonds pay annually, quarterly, or monthly.

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