CORPORATE BOND FUND
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:
- 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.
- 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.
- 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.
Important Differences 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 bonds, 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.
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.
Frequently Asked Questions
Are corporate bond funds safe?
Corporate bonds are excellent for investors who want a safe but higher return on their investment. Debt funds involving corporate bonds include highly rated corporate bonds ranked (AA+ or higher) and are mostly open-ended.
Which is the best corporate bond fund?
- Sundaram Corporate Bond Fund
- Kotak Corporate Bond Fund
- Invesco Corporate Bond Fund
- Edelweiss Corporate Bond Fund
We suggest you check all your options before investing.
How much interest do corporate bonds pay?
Corporate debt funds in India have offered relatively higher return than other debt funds. In the past year, these bonds have delivered a yield of 8.8 percent.
What are the advantages of corporate bonds?
- Lower risk due to investment in highly rated corporate bonds
- Corporate debt funds offer a higher return than traditional government bonds for the same maturity period
- Offer more returns than fixed deposits
- These bonds are available at different maturity profiles. Short term bonds have a maturity of five years and less
- Some corporate bonds are available for trading in the secondary market
- Have better tax implications for higher tax bracket individuals
What happens when a corporate bond matures?
The investor receives the face value of the bond along with any accumulated interest (unless the interest is paid periodically) at the time of redemption.
Do corporate bonds have tax advantages?
Corporate bonds in India aren’t tax-free. According to the Income Tax Act of 1961, interest earned from corporate bonds is subject to tax as per income tax slabs. However, you can reduce tax implications on your investment if you stay invested for a longer period. Interest income on your corporate bond will attract short term capital gain tax (STGC) if the investment period is less than three years. Beyond the period of three years, 20% long-term capital gain tax will levy.
Corporate Bonds are for fixed terms – what happens if I want to sell before the term ends?
You must understand that when you sell a bond, you are shifting the rights to receive yields on it to the other party. So, your only gain is the price you can negotiate for the bond.
The intrinsic value of the corporate bond depends on the interest rate. The bond value tends to rise when interest rate falls, and conversely, its value falls when interest rate increases because the new bonds will offer a higher return. So, when you sell a corporate bond before maturity, its value can be more or less depending on supply and demand factors.
How are corporate bond funds taxed?
Interest earned on the corporate bonds is taxed as per capital gain tax rates. If the investment period is less than three years, the short-term capital gain tax rate applies to it. And for an investment period of more than three years, 20 percent capital gain tax applies as per section 112 of Income Tax Acts.
Are corporate bonds a good investment?
Corporate bonds and lower to moderate risk investments, suitable for investors who are risk-averse but wants a higher return. In the last one-year, corporate bonds have faired with 8.8 percent return as compared to other low-risk investment choices. These bonds also offer tax benefits, mainly if you belong to a higher tax bracket.
Is corporate bond interest included in gross income?
In your income tax return filing, the interest from corporate bonds is listed under ‘income from other sources’ section.
How are corporate bonds different from term deposits?
Corporate bonds and term deposits both are popular choices, but there are several dissimilarities between the two.
- Term deposits and corporate bonds both offer steady income to investors, but since bonds are riskier than deposits, they tend to provide a higher return
- You can trade corporate bonds in the secondary market
- The yield on your investment depends on the interest rate that you receive. For term deposits, the return is fixed. But since corporate bonds are traded in the secondary market, their prices fluctuate depending on demand
- Choices of terms deposits are numbered, but corporate bonds come in many forms, allowing you to diversify your portfolio and optimise returns