Skip to content Skip to sidebar Skip to footer

Corporate Bonds in India: An In-Depth Guide

Introduction

Corporate bonds are essentially debt instruments issued by a company to raise funds towards working capital or meeting capital expenditure plans. If you are buying corporate bonds, you are just lending money to a company, in lieu of which you will receive interest from it periodically for a fixed period of time. At the end of the maturity period, you get back the principal amount along with the interest accrued on it.

What are Corporate Bonds?

Corporate bonds are issued by companies for raising finance for a variety of reasons such as for building a new plant, buying equipment or for business expansion. Corporate bonds are generally medium to long term debt instruments and have a maturity of more than one year. Debt instruments issued by corporates with maturity shorter than one year are referred to as commercial paper.

Features of Corporate Bonds in India

  • Taxable: Interest on corporate bonds is generally taxable.
  • Credit Rating Criterion: Corporate Bonds can be classified into two types on the basis of Credit Rating: Investment Grade and Non-investment Grade (Junk Bonds). Bonds having a credit rating of AAA to BBB are considered as Investment Grade Bond, others are considered as Non-investment Grade Bond.
  • Coupon rate: Corporate bonds have higher coupon rates than G-secs. Normally, corporate bonds provide 7% (AAA rated) to 12% (A rated) coupons in the current year 2021. On the contrary, G-secs provide a 6% coupon rate. Many times, investors prefer investing considering corporate bonds interest rates.
  • Tenor: Corporate Bonds have shorter tenures as compared to G-secs.

Benefits of Corporate Bonds

  • Higher Returns: Corporate bonds look attractive as they give investors regular inflation-beating returns. A corporate bond may offer a fixed or floating rate of interest. Accordingly, you may earn a fixed or varying amount of interest periodically.
  • Stable Returns: Due to stable returns, corporate bonds are considered less risky than equity shares. Though you may not enjoy any ownership in the company like when you buy equity, your capital is still protected from any massive fluctuation in the stock market.

Risks Associated with Corporate Bonds

  • Credit Risk: The risk that the issuing company will default and be unable to pay back the principal or interest.
  • Interest Rate Risk: Bond prices have an inverse relationship with interest rates.

Tax Implications

Interest earned from corporate bonds is subject to tax as per income tax slabs. This means, if you fall under the 30% tax bracket, you pay 30% tax on interest earned in corporate deposits.

Evaluating Corporate Bonds

Before investing in a corporate bond, it’s crucial to evaluate the following aspects:

  • Company’s Background: Look into the history of the company you want to start an FD with.
  • Repayment History: Check the company’s track record of meeting its financial obligations.
  • Credit Rating: Consider the credit rating of the company. It’s ideal to invest in a high-rated corporate deposit with AAA or equivalent rating.
  • Interest Rates: Compare the interest rates offered by different companies.
  • Terms and Conditions: Understand the terms and conditions of the deposit, including the lock-in period and penalties for premature withdrawal.

Corporate Bonds vs Inflation

Inflation is a crucial factor to consider when investing in any fixed-income instrument, including corporate bonds. The real return on your investment is the nominal return adjusted for inflation. If the interest rate on your corporate bond is lower than the inflation rate, you’re effectively losing purchasing power. As of 2023, the annual inflation rate in India was recorded at 6.95%. Therefore, to ensure a positive real return, the interest rate on your corporate bond should ideally be higher than this.

Current Market Returns

The interest rates on corporate bonds can vary significantly depending on the company and the tenure of the deposit. As of now, here are some of the interest rates offered by various companies for different tenures:

  • Canara Robeco Corporate Bond Fund: 6.89% for 1 year
  • UTI Corporate Bond Fund: 7.53% for 1 year
  • Baroda BNP Paribas Corporate Bond Fund: 7.80% for 1 year
  • Aditya Birla Sun Life Corporate Bond Fund: 7.81% for 1 year
  • Nippon India Corporate Bond Fund: 7.75% for 1 year
  • Tata Corporate Bond Fund: 7.63% for 1 year
  • PGIM India Corporate Bond Fund: 7.42% for 1 year
  • Invesco India Corporate Bond Fund: 7.37% for 1 year
  • Kotak Corporate Bond Fund: 7.63% for 1 year

Please note that these rates are subject to change and may vary based on the company’s terms and conditions. It’s always a good idea to check the latest rates before making an investment.

Conclusion

Corporate bonds can be a lucrative investment option for those willing to take a moderate level of risk for higher returns. However, it’s essential to thoroughly evaluate the company and understand the terms of the deposit before investing. As with any investment, diversification is key. Therefore, corporate bonds should be a part of your larger investment portfolio rather than the sole investment avenue. Remember, investing is a journey, not a destination. Happy investing!

Disclaimer: The information provided in this guide is for general informational purposes only. It is not intended as legal, financial, or investment advice. Always consult with a qualified professional before making any investment decisions.