As markets turn volatile and equity returns fluctuate, how can smart investors look for balance? The simple answer is through corporate bonds. Nowadays, we deal with highly unpredictable markets. Therefore, there are several reasons to invest in corporate bonds as they offer impressive benefits, lower volatility, predictable returns, and stability. These core financial instruments are now being used by smart investors who want their portfolios to experience impressive growth, even when the market might not be growing.
With the help of leading digital lending platforms, like Stashfin, the concept of corporate bonds and other financial tools has become mainstream for most investors. While bonds have not been new in India, recent times have increased their overall popularity. There are several factors that have contributed to this rapid rise.
Here are some top reasons you should invest in corporate bonds in India:
- Predictable Income
Corporate bonds are a type of debt security that is issued by companies to raise capital. They offer the promise of regular interest and the return of principal during maturity.
When corporate bonds are compared with equities, bonds are quite steady and balanced. The overall interest payments deliver a steady cash flow. This is perfect for those who are looking for a source of fixed income. In case the market situation is uncertain, investors can look out for corporate bonds for a regular cash flow.
At the same time, in the case of fixed income bonds, most corporate bonds are available for short, medium, and long durations. This helps investors in fulfilling their financial goals within the given period.
- Diversification of the Portfolio
When you wish to indulge in smart investing, you should consider portfolio diversification. In your portfolio, when you include corporate bonds, it helps provide a balance between the changes in equities. When compared with the stock market, bond prices tend to move inversely to the respective interest rates. Therefore, when the stock market goes down, the bonds still remain stable.
When you are investing in corporate bonds, you should look into the ratings. For example, investment-grade bonds (like AAA or BBB) are regarded as quite safe and more dependable. On the other hand, bonds that have a rating from BB to D are considered junk bonds and might be available at a higher risk. As an investor, you can choose the right corporate bonds for investment based on your overall comfort level with credit risk.
- Transparency
There is no denying the fact that corporate bonds are available with some credit risk. This is the case when the issuer might default. However, these issues are effectively managed by authoritative bodies. For example, organizations or agencies like CARE, CIBIL, and others take care of the risk assessment of corporate bonds. Therefore, it is important for investors to look into credit ratings before they invest in corporate bonds in India.
With the help of leading, reliable online platforms, in-depth prospectuses and documentation are available easily. You will observe that some corporate bonds are available as secured. Such bonds offer investors a first claim over assets in case any insolvency takes place. In the case of unsecured bonds, they might offer higher yields but might be at a higher risk.
- Better Returns
Usually, corporate bonds yield better overall returns when compared with government bonds and fixed deposits. Banks indeed provide safety. However, their rates lag behind those offered by investment-grade corporate bonds. These bonds are capable of delivering higher returns for most investments.
- Ease of Access
Earlier, buying bonds meant you had to apply to brokers for high-ticket sizes. However, leading online platforms have changed this scenario. Leading bond-investing platforms help investors to take part in bonds with ticket sizes that are as low as INR 10k. In some cases, some platforms allow you to apply for a 2000 loan as well. Investors can consider choosing primary offerings or buying bonds in secondary markets as well. All of this is done digitally without the involvement of any charges or brokers.
- Tax Efficiency
It is important to look into tax considerations during investments in India. Profits that you earn out of listed bonds and hold for over a year will qualify for long-term capital gains tax. On the other hand, unlisted bonds will have different limits.
- Reinvestment Opportunities
You can trade corporate bonds on secondary markets in some cases. As an investor, if you need cash before maturity, you can easily sell them. Most portfolios make use of a ‘ladder’ strategy to help you hold bonds with increasing maturities to enhance cash flow and manage interest rate risk.
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What are the Benefits of Investing in Corporate Bonds?
- There is a wide range of variety available with respect to maturities. For example, short-term bonds mature within a few years. On the other hand, long-term bonds mature over decades. Therefore, you can choose bonds that sync with your particular investment goals. You could be setting up a retirement fund or searching for quick & short-term returns.
- In case an organization files for bankruptcy, corporate bondholders will have higher assets or claims when compared with equity/stockholders. This implies that you have a higher chance of recovering some of your initial investment in such cases.
- Every corporate bond comes with a credit rating from leading agencies. This helps you understand the overall creditworthiness of the company and the risks in which you are involved. This helps you choose companies with higher credit ratings if you wish to minimize your overall risks.
- Interest or coupon payments tend to be mostly fixed. This helps you understand how much income you will receive and the timeline for the same. It helps you balance more volatile components in the respective portfolio.
Conclusion
In India, corporate bonds are effectively becoming a smart investment choice for investors who want to achieve a balance of diversification, steady returns, and safety. There are options for growth-focused and conservative portfolios. They offer a great way to build wealth and keep risks in check.
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