As little as it maybe, any investment is a service you do for your future self and anybody associated with your life at the time. An investment should assuage your goals and service your plans of travel, early retirement, or stepping up in life with a new business or marriage. The gradual accumulation of funds and a set reward system keeps the passion alive for months on and years. It gives wings to our growth while also ingraining confidence in ourselves.
It should not have to follow the market trend or a popular product that everyone is talking about investing in. A lot of professionals who are also independent thinkers set an investment strategy in a fashion that helps them in the long-term and provides a short-term momentary fulfilment before it sets on a compounding journey.
The feeling of “the investment kept its promise and I can give it another go” at the end of the term, is what an investor really should go for. It involves time and patience. That is why, it is enticing to a great deal of people. The smartest person in the world, Albert Einstein once said, “Compound interest is the Eighth wonder of the world.” It is the snowball effect which involves efforts at the beginning but once it starts mushrooming, it grows and grows further.
Speaking of compounding interest and time, bond has a marketplace of its own since a very long time. And technology has only fed in to the interest in a vast majority of people, over a period of time, along with the inflow of social media and digital marketing. Bond investment was only for a handful of investors such as corporates, banks, and HNIs. It has become more prevalent in the past few years, and most investors prefer diversity in their portfolio.
A bond is a debt agreement that an entity gets in with the investor with a promise to pay fixed interest at a fixed period of time and then the principal amount is repaid at maturity. They are fixed income instruments issued by companies or government which are tradeable assets.
Every time you need a loan, you go to a bank or simply download an app-based platform to apply for loans. The finance company issuing the loan to you, then, goes through your application, checks your credit score, and issues a statement saying whether or not they will be in a position to lend you money.
Nowadays, the app-based platforms set up their own ratings to open gates for more and more people. For example, the statement issued by the lender might say they cannot fulfil your request for XX amount of loan, but you can start with a lower amount and then gradually move up to the bigger amounts with timely payments. Thus, the lender can opt out or apply.
Corporate bonds work in somewhat similar fashion When a company needs funds for expansions, acquisitions, or operational purposes, they roll out bonds for investors. From the investor's point of view, they are lending companies money, relying on an independent opinion provided by credit agencies on a company’s ability to meet payment obligations in the past a well as the future. Investors do not have ownership rights in the company as in equity. The interest rates and tenure are pre-determined. Hence, the room for loss is minified.
A Bond is issued in the primary market by a company, then traded in the secondary market among investors. In the secondary market, the bond’s value and yield is ascertained by factors such as demand and supply, current interest rates, liquidity, etc.
Purchase price of a bond is determined by the yield of the bond. Yield is the total return anticipated on until it reaches maturity. The diagram below will flash more light on the yield performance during the life of the bond.
If the price of the bond falls, the yield increases, when the price of the bond rises, the yield is less.
Corporate Bonds are based on two types: On Maturity and on Coupon.
Based on Maturity.
- Perpetual bonds
- Perpetual bonds are issued by companies with an intent to only pay a fixed coupon or interest rates at a fixed date with no maturity date.
- Additional Tier 1 bonds are most popular kind of Perpetual bonds, issued by banks. Mostly issued under Basel norms by banks, to meet their financial requirements with a call option. In case banks fail to maintain the capital adequacy, they can write off the interest payments or even principal. This is one of the major risks an investor can run into while investing in this type of bonds. However, Perpetual bonds have higher yields than regular ones.
- Long-term Bonds
- Long-term debt funds are bonds with longer maturity period. The time period of investment ranges from five to forty years. Long-term bonds can be issued by banks, governments, and corporates.Long-term bonds pay higher yields than short-term bonds due to the longer tenure risk. That being said, the longer you hold these bonds, the more sensitive they become to change in market interest rates.
- Short-term Bonds
- Short-term bonds are mostly issued by corporates. They are less risky compared to other bonds. Since the risk factor is less in these bonds, returns are also less. They offer liquidity, but a smart investor will always choose to reinvest the securities to gain a higher rate of interest. They are a great source of portfolio diversification.
Based on Coupon
- Zero Coupon Bonds
- Before understanding this kind of bonds, let us first understand what are coupons. A coupon is the interest received on a (face value) bond yearly until it reaches maturity. Zero coupon bonds do not pay interest as mentioned above. An investor is issued the bond at a discount price and then paid the face value of the bond at the end of maturity.
- Zero coupons have an investment horizon of more than seven years. One thing to pay attention to is that you will not be paid interest during the life of the bond. However, they can be sold in the secondary market. It is best for people who anticipate specific funds after a long period of time.
- The income on the bond is earned by capital appreciation.
- Fixed Rate Bonds
- Investments should not always be for higher returns and growth. Sometimes it should be made to reach stability and capital safety. In case the market crashes, you should have something to fall back to; a place where your investments are safe.
- The investor amps up the interest rate paid periodically in the agreement along with the maturity dates. Fixed-rate bond could either be short-term or long-term, and the lock-in period ranges anywhere between one and five years.
- The investors are paid interest annually or semi-annually, but in case an investor wishes to withdraw early, they are charge a penalty.
- The perks are visible to investors who are willing to go the distance.
How to invest in Corporate bonds?
A Bond instrument ensures a regular source of income for its investor. Before investing in corporate bonds, make sure you have done a thorough research about the company and its financial standings and the risk involved in setting your money for long-term and short period of time.
To invest in corporate bonds, the investor needs a demat account, where the bonds are deposited after purchase. It is a way of cutting down paperwork and holds your bond in electronic format. Once you have that straightened up, make a decision about your investment horizon, risk appetite, and the amount you are willing to allocate.
In a primary market, bonds are issued directly by the companies. An investor will have to fill in an application form and submit it to the issuer with the payment. In the secondary bond market, bonds that are bought in the primary market are traded among investors.
Visit BondsIndia bond section and go through the various bond options available, along with their credit ratings and minimum investment required. It is India’s first blockchain-based platform for fixed-income securities. Choose the bond that meets your investment goals and go for it. Once you have made the purchase on our platform, the security will then be issued to you in the Demat account.
In case you don’t have a demat account, you can open one. If you do not wish to open a demat account, the bond will be issued to you in a physical form.
Also Read - How to Make Your Money Work in 2021?
Five Benefits of corporate bonds in India
- 1. Diversity
- You have a barrage of options to choose from while investing in corporate bonds. Depending on your risk appetite, you can choose high-risk, low-risk, bonds with the highest ratings or bonds with low ratings that offer higher interest rates.
- 2. Security
- Most corporate bonds are secured. If you go for secured bonds, chances are you will be the first one to get paid should the company goes in to unforeseen financial jeopardy.
- 3. Secondary source of income
- Investors need not wait for the date of maturity. They get the interest they are promised annually, ensuring a secondary source of income while upholding their principal investment.
- 4. Liquidity
- Liquidity is synonym to corporate bonds. Corporate bonds are open to be traded in the secondary bond market. You can buy and sell the bonds once they have been issued to you in the primary bond market.
- 5. Gains
- The gains are greater because the risk involved is also greater than the government bonds.
How to sell corporate bonds in India?
The bonds are meant to be held till maturity, however, if you wish to sell it before maturity, you can trade them in the secondary market. The selling price of the bond may vary depending on a lot of factors like interest rate , demand at the time. On the exchange, you will have to sift through different types of investors to find retail investors. Even when you find one, you will need to settle on a price, which takes a lot of back and forth and negotiations.
There are other online settlement platforms where the brokers buy bonds from you. They are safer channels for selling your bonds, as the counterparty risk is close to none. Furthermore, the buyer has to settle the payment only then the bonds will be issued else, they will be credited back in to your account.
Services such as BondsIndia ensure your bond is purchased at a competitive price and settlement is done in a secured manner. BondsIndia is a block-chain, and technology-driven platform for selling and purchasing bonds and other fixed income securities. BondsIndia is not only a digital trading platform but also a knowledge sharing platform .
All in all, don’t haste. You do a rigorous check on the bond market, company’s current standing and its background - whether it is to buy or to sell bonds. Making a few phone calls to people who know more than you on the subject will shed light on the issuer/buyer's credibility, even when everything looks great on paper. Some brokers try to create uproar about certain deals just so they can buy it from you at a discounted price. Keep your options open.