Investing in India has traditionally involved the stock market and fixed deposits (FDs). Stocks provide very high growth, though with big swings, whereas FDs are secure, though often return little above inflation. Corporate bonds in India provide a compelling balance of higher returns than FDs with greater stability than the stock market. In recent times, Indian investors have increasingly turned to corporate bonds as a strategy for diversification as well as generating regular income, helped by new intermediaries and regulations, making it simpler for individual participants. This guide takes you through how corporate bonds work, their pros and cons, types, how to invest, as well as new trends in the Indian bond market.
What are Corporate Bonds and How Do They Operate?
Corporate bonds are company loans that you provide. For lending, you receive regular interest (coupon) as well as your principle back on maturity. They are regulated by SEBI and kept in demat form.
Key features of corporate bonds include:
- Maturity Date: The day on which the firm is required to return the principal. Bonds can be short-term (maturing within a few months) or long-term (maturing several years from now).
- Coupon Rate: The company’s fixed rate of interest, typically paid semi-annually or yearly. For instance, a bond worth ₹1,00,000 bearing an 8% yearly coupon would repay ₹8,000 per year (or ₹4,000 per six-month period, if paid semi-annually).
- Face Value (Par Value): The sum you borrow for each bond (for example, ₹1,000, ₹10,000) that is repaid at maturity. Until recently, several corporate bonds had big face values (₹10 lakh), deterring individual investors. SEBI recently cut the face value of most bonds from ₹1 lakh (and ₹10 lakh before 2022) to ₹10,000, hoping to make them attractive for small investors.
- Credit Rating: An independent grade (by organizations such as CRISIL, ICRA, CARE) reflecting the credit risk of the bond. The higher the rating (AAA), the bond is highly secure with a lower default probability. The lower the rating (say BBB or A-), the higher the risk, but generally the higher the return. The rating helps the investor judge the creditworthiness of the company.
- Yield to Maturity (YTM): The overall return per year you’d obtain from owning the bond until maturity, taking into account both the interest as well as the difference between purchase price and face value. If you purchase a bond for face value and own it until maturity, the YTM is essentially the coupon rate.
- Callable Bonds: There are some corporate bonds which are callable, where the business can repay the bond earlier (prior to their maturity dates). This tends to occur if there is a dramatic decline in the interest rates where the company can “call” the bond and issue new debt with a lower rate. For the investors, callability creates reinvestment risk – risk of reinvesting returned funds with lower rates.
The majority of Indian corporate bonds are Non-Convertible Debentures (NCDs) by way of public issues or private placements, many of them being listed on exchanges.
Types of Corporate Bonds in India
- Secured/Unsecured Bonds: Secured bonds are secured by collateral and are typically safer. Secured bonds depend on the credit rating of the issuer.
- Non-Convertible Debentures (NCDs): Prevalent among individual investors, NCDs provide fixed yields and are not convertible into equity.
- Convertible Bonds: Provide the ability to convert into shares of equity down the line. Typically have lower interest, however, with possible upside.
- Perpetual bonds: No maturity, greater return, but greater risk—typically by banks.
- Floating Rate Bonds: Coupons vary with benchmarks such as MCLR or yields of G-sec, providing safety from the fluctuations of interest rates.
- Listed/Unlisted Bonds: They are traded more easily and are more transparent. Unlisted bonds have a higher return but entail higher risk.
It is essential to know the nature of the bond as it plays an instrumental role in determining the risk as well as the return. For example, a AAA-rated secured NCD by a big company is much low-risk compared to a BBB-rated unsecured bond of a small company. The former could provide a return of around 7-8% with low risk, whereas the latter might provide 12% or higher with considerable credit risk.
Why Invest in Corporate Bonds in India
- Regular Income: Regular monthly, quarterly, or semiannual payments
- Higher Yields: AAA bonds provide 7–8%; lower-rated bonds up to 13%.
- Diversification: Stabilizes equity-heavy portfolios
- Capital Safety: Especially in high-rated bonds.
- Financial Planning: Steady income flow
- Tax Efficiency: LTCG of 10% on listed bonds held >12 months.
India’s bond default rate declined to a 16-year low of 1.3% for FY24, indicating better market safety.
Risks to watch
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Credit Risk: Possibility of issuer default.
- Interest Rate Risk: Increasing rates can decrease bond prices.
- Liquidity Risk: It can be difficult to sell certain bonds.
- Call/Reinvestment Risk: Early redemption can disrupt returns
- Inflation Risk: Long-term return can trail inflation.
- Downgrade Risk: The rating can be lowered, impacting price.
Reduce risks by diversifying and focusing on quality issuers.
How to Invest in Corporate Bonds in India
- Public Issues (NCDs): Invest through brokers or trading applications within the offering times.
- Secondary Market: Trade bonds on NSE or BSE through a demat account.
- Online Platforms: Fintechs like Stashfin offer curated options, starting from Rs. 10,000.
- Debt Funds & ETFs: Managed exposure to a basket of bonds.
- Private Placements: Available through select brokers for bigger investors.
You’ll need a demat, KYC, and PAN to begin. Always read the bond prospectus so you know the terms and risks.
Current Market Trends
- Retail Access: SEBI cut the minimum lot to ₹10,000, increasing participation.
- Fintech Growth: Stashfin makes investing easy by emphasizing yields.
- Selectable Coupons: Interest rates have peaked, leading to high yields.
- Low Defaults: FY24 saw one of the lowest corporate bond default rates.
- Tax Reforms: 2023 tax changes make direct bond investing more favorable than debt mutual funds.
Endnote
Corporate bonds in India are becoming an increasingly powerful asset class for Indian investment portfolios. They provide multiple sources of income, stability, as well as modest growth. With digital access, investor protections, and SEBI reforms, bonds are no longer just for institutions. Whether you are a risk-averse saver or a yield-oriented investor, quality corporate bonds provide a wonderful means of diversifying as well as earning.
Begin small, diversify, and pick reliable platforms. With India’s growth outlook strong and yields still attractive, this is a great time to let your money work for you through corporate bonds.