It is a type of debt security that corporations sell to investors.
These bonds are generally short-term investments.
The Indian economy has been greatly affected by the COVID-19 and is showing little signs of recovery. The INR (Indian National Rupee) saw a decline of about 0.5%, and the face value soared to 75.9125 per dollar in April 2020 itself. Given such volatile economic times, investors need to be doubly cautious about what they are investing in and for how much time. Now, corporate bonds could be the answer! What’s noteworthy is that even government bonds have been greatly affected, which is quite unusual. Therefore the prices and yields of corporate bonds can often prove to be more beneficial.
What is Corporate Bond?
It is a type of debt security that corporations sell to investors to raise finance for their operations. In simple terms, if you are purchasing this type of bond, you are lending money to the corporation/company issuing bond. In return, the corporations make a legal commitment to repay the borrowed money with interest at fixed intervals. Corporate bonds are a low-risk, short-term investment tool that investors are now looking for. Usually, they also offer higher returns compared to government bonds.
Why is this a good time to buy corporate bonds?
Usually, corporate bonds have a higher interest rate compared to government bonds. At this period, government bond yields would remain low enough to make corporate bonds attractive as a higher-yielding alternative. Mean yields of 8-10% can be expected from corporate debt instruments. Govt. bonds yield about half of that figure.
Before any investment, you must gauge the risks. Corporate bonds, as compared to shares, have a lower risk factor and, in India, are less at risk. These bonds are also not affected by inflation.
Act as a buffer for stock-market volatility
In the current pandemic situation, bonds did their job as the anchor in a portfolio even though they were slightly down. Bonds not only safeguard against stock market downturns, but they also provide emotional support to any diversified portfolio. Bonds can help you bring down the overall portfolio volatility by effectively using asset allocation as an instrument to de-risk. In that case, investors lower their long-term expected returns to accept the less short-term risk to trade-off.
These bonds are generally short-term investments. Within a short time, you are likely to reap the benefits of your investment.
In the mid of COVID-19, when there is a stock market crash, people are losing their jobs, businesses are locking up or going under, cash becomes the king. Bonds provide stability for those who have to use their portfolio to meet living expenses or large purchases. There’s little lock-in period involved, and these can be bought and sold whenever the investor so wishes.
Protection against deflation
The biggest risk with bonds over the long term is always inflation. When there’s inflation, your bond income is worthless over time. However, bonds protect you against deflation because, in a deflationary environment, they’re worth more. This is why bonds tend to do so well during a recession.
Corporate bonds can be of varying types based on fund tenure, company credit ratings, etc. to meet the tastes and preferences of different types of investors. Bond terms vary between short, medium, long and perpetual. A few of the most popular corporate bond options to invest in India are Aditya Birla Sun Lie Corporate Bond Fund, Kotak Corporate Bond Fund, ICICI Prudential Corporate Bond Fund, Nippon India Prime Debt Fund, HDFC Corporate Bond Fund, etc..
There are not many other options
You can take a similar buffer through online savings accounts, money market funds, or certificates of deposits (CDs), but these also don’t yield much and don’t have nearly as much interest rate risk. If bond yields were to contract further, you wouldn’t benefit much, but that’s the price you pay for safety.
Therefore it is time to invest in corporate bonds. But, always remember that corporate bonds are subject to credit risks and risks of price decline and even total loss if the borrower can no longer repay the debt. The selection of the right bonds at the right time requires extensive knowledge and experience. Therefore talk to your financial consultant.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
(About Author: Arindom is a professional writer, editor, blogger and a member of the International Association of Professional Writers and Editors, New York. A management postgraduate in finance with extensive industry exposure, he is associated with many reputed global online magazines and publications as a regular contributor. He loves to help his readers writing highly informative and well-researched investment-related content to make informed decisions.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of organization)