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Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
Corporate bonds are debt securities issued by companies to raise capital, offering investors regular interest payments and the return of principal at maturity.
Corporate bonds are an investment option for those looking into fixed-income securities. After the financial crisis, the returns on many fixed-income assets dropped, making corporate bond interest rates more attractive.
Corporate bonds, also known as non-convertible debts, are issued by organizations and businesses to fulfill the financial requirements for everyday operations. These can include future expansions and opportunities for development. Investors who purchase corporate bonds issued by firms are known as bondholders. The corporation’s payment capabilities support these bonds, and they come with interest rates more significant than those offered by the government. This blog will discuss corporate bonds, their types, and how they benefit investors.
A corporate bond is a type of loan that you, as an investor, provide to a corporation. When you buy a corporate bond, you lend your money to the company. In return, they promise to repay you the initial amount you invested (the principal) with some interest over a specified period. This is done to offer financial help to the corporation for its functioning and to provide the benefit of returns to the bondholder.
Companies can also invest in debt for financial purposes. This is a safer option for them because it does not affect shareholders immediately. Therefore, most companies prefer to issue debt instruments to raise money for their operations. Corporate bank loans can be expensive, depending on the company’s needs.
Corporate bond funds operate by pooling money from multiple investors like you and me. This pooled money is then used to purchase a wide variety of corporate bonds. Here’s a bit more detail on how they function:
Diversification
Instead of buying just one bond, the fund invests in bonds from multiple companies across various sectors. This diversification reduces risk because if one company defaults, the impact on the entire fund is minimized.
Interest Income
The main appeal of corporate bond funds is the interest income they generate. Corporations pay interest to the bondholders (which, through the fund, includes you). This interest is then passed on to you as an investor in the form of regular payouts.
Active Management
Professional fund managers actively manage many corporate bond funds. These experts decide which bonds to buy or sell, aiming to maximize returns and minimize risks.
Liquidity
One of the benefits of investing in a fund rather than individual bonds is liquidity. Corporate bond funds are traded on the market, so you can buy or sell your shares more easily than if you hold individual bonds.
As per the market demand, various types of corporate bond investments exist. Here are the five basic types of corporate bonds:
Here is a closer look at some of the features that make corporate bonds an attractive investment option:
One of the biggest draws of corporate bonds is the regular, fixed-interest payments. These payments, known as “coupon payments,” are typically made semi-annually or annually. The rate is predetermined, so you know exactly how much income you’ll receive and when you’ll get it. This predictability can be a great way to balance out the more volatile elements of your portfolio.
Corporate bonds come in a wide range of maturities, from short-term bonds that mature in just a few years to long-term bonds that can last several decades. This flexibility allows you to choose bonds that align with your financial goals, whether looking for quick returns or planning for retirement.
Every corporate bond is assigned a credit rating by agencies. These ratings provide insight into the issuing company’s creditworthiness and help you assess the risk involved.
While corporate bonds are generally less liquid than stocks, they are still traded on secondary markets. This means you can sell your bonds before they mature if you need access to cash. However, keep in mind that selling before maturity might result in a different return than holding the bond until its end date.
In the unfortunate event that a company goes bankrupt, bondholders have a higher claim on assets than equity holders (stockholders). This means you’re more likely to recover some of your investment than shareholders, providing security.
If you are wondering about the advantages of investing in corporate bonds, we have you covered. A corporate bond fund is a good investment for the following reasons.
Corporate bonds’ interest rates typically offer a higher return than government bonds. It provides a tremendous investment if you are searching for better rewards.
It is essential to evaluate an investment’s potential danger before deciding whether or not to make it. Corporate bonds in India, for that matter, are less at risk because the inflation rate has little effect on them.
These bonds are typically considered to be investments with a shorter duration. It takes a short time to see a return on your investment.
Depending on your tax bracket, you must pay short-term capital gains tax (STCG) if you hold a corporate bond fund for under three years. Section 112 of the Indian Income Tax, however, imposes a 20% on long-term capital gains tax. It applies to people who have held the bond for over three years.
If you’re considering this investment option, you’re likely looking for a balance between risk and return, aiming for more predictability than stocks but potentially higher yields than government bonds.
First, clarify your investment objectives. Are you looking for regular income, capital preservation, or long-term growth? Understanding your goals will help you choose the right type of corporate bond fund, as some focus on high-yield bonds, while others prioritize investment-grade bonds.
Corporate bond mutual funds carry varying levels of risk, primarily related to credit quality and interest rate changes. High-yield bonds offer higher returns but come with increased risk, while investment-grade bonds are safer but yield lower returns. Evaluate your risk tolerance to decide which type of fund suits you best.
Once you have a clear idea of your goals and risk tolerance, research different funds. Look at factors like:
While corporate bond funds can provide good returns, it’s wise not to put all your eggs in one basket. Consider diversifying your investments across different asset classes, such as stocks, government bonds, or real estate, to balance risk and reward.
Investing isn’t a set-it-and-forget-it task. Keep an eye on your fund’s performance and market conditions. Interest rate changes, economic shifts, or changes in the credit quality of the companies can impact your investment. Be prepared to adjust your portfolio as needed.
There are several reasons why investors consider corporate bond mutual funds:
Corporate bonds typically offer higher interest rates than government bonds to compensate for the increased risk.
Investing in a mutual fund offers diversification across different industries and credit qualities, reducing individual company risk.
These funds are managed by professionals who make decisions based on market conditions and research, which can be beneficial for those who don’t have the time or expertise to manage individual bonds.
Corporate bond mutual funds offer liquidity, allowing you to buy and sell shares at the current net asset value (NAV).
Regarding taxes, corporate bond funds are treated like debt funds for income tax purposes. Here’s how the taxation works:
If you sell your fund units within three years of purchase and make a profit, those gains are considered short-term capital gains. These gains are added to your income and taxed according to your income tax slab rate.
If you hold your fund units for more than three years before selling them and making a profit, those gains are classified as long-term capital gains. These are taxed at 20%, but you benefit from indexation. Indexation adjusts the purchase price of the units based on inflation, which can lower your taxable gains.
Some investors buy corporate bonds not because they want the income from the interest payments but because they believe that the bond’s price will go up. This is known as speculating on the bond market.
Corporate bonds are a low-risk acquisition option if you seek an investment that you can use for the short term. In comparison to government bonds, they provide investors with better yields. They come in various types, each with its unique features, and offer benefits like steady income, safety, diversification, and the potential for capital gains.
So, whether you are a seasoned investor or a newbie in the world of finance, corporate bonds can be a beneficial addition to your investment strategy. Remember to research, understand the risks, and choose the bonds that align with your financial goals.
1
A corporate bond is a type of debt security issued by a corporation to raise capital, where the company promises to pay back the principal amount with interest to bondholders at a specified date.
2
Corporate bond funds are generally considered safe compared to stocks, but they do carry risks, such as credit risk and interest rate risk, depending on the creditworthiness of the issuing companies.
3
Corporate bonds can be a good investment for those seeking higher yields than government bonds, but they come with higher risk. They are suitable for investors looking for regular income and diversification in their portfolios.
4
The advantages of corporate bonds include higher yields compared to government bonds, diversification benefits, and predictable income through interest payments.
5
Examples of corporate bonds include General Electric bonds, and Amazon.com Inc. bonds, which are issued by these corporations to finance various operations or projects.
6
The two types of corporate bonds are investment-grade bonds, which have lower risk and lower yields, and high-yield (or junk) bonds, which have higher risk and higher potential returns.
7
Corporate bonds can offer higher returns than fixed deposits (FDs) but come with greater risk. They may be better for investors willing to accept more risk for higher income, while FDs are safer with guaranteed returns.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
