Corporate bonds are becoming an increasingly popular investment option for those looking for stable returns, regular income, and portfolio diversification. But like any financial instrument, they come with their own set of risks and rewards.
In this post, we’ll break down what corporate bonds are, why you might consider investing in them, their benefits, potential risks, and essential tips to keep in mind.
What Are Corporate Bonds?
Corporate bonds are debt instruments issued by companies to raise capital. When you invest in a corporate bond, you’re essentially lending money to the company in exchange for regular interest payments (called coupons) and the return of the principal amount at maturity.
Example:
If you buy a ₹10,000 bond with a 7% annual coupon for 5 years, you’ll receive ₹700 every year and get your ₹10,000 back after 5 years.
Benefits of Investing in Corporate Bonds
1. Higher Returns Than Government Bonds or FDs
Corporate bonds often provide better yields compared to government bonds and fixed deposits. Depending on the credit rating and tenure, the returns may range between 6% to 10% or more.
2. Regular Income Through Interest Payments
Most corporate bonds offer fixed interest at regular intervals (monthly, quarterly, or annually), making them a great choice for retirees or anyone seeking predictable income.
3. Diversification of Portfolio
Adding corporate bonds to your portfolio helps reduce overall risk, especially when balanced with equities and mutual funds. Bonds generally behave differently than stocks, offering a hedge during market volatility.
4. Variety of Choices
There are many types of corporate bonds—secured, unsecured, convertible, non-convertible—offering investors flexibility in terms of risk and reward.
5. Liquidity in the Secondary Market
Many corporate bonds are listed on exchanges and can be sold before maturity, giving investors the option to exit early if needed.
How to Invest in Corporate Bonds in India?
You can invest in corporate bonds through:
- Stock Exchanges (NSE/BSE)
- Bond Trading Platforms (e.g., GoldenPi, BondsIndia)
- Mutual Funds that invest in corporate debt
- Demat Account via brokers
- Primary Issues of NCDs during public offers
Key Features of Corporate Bonds
Corporate bonds, issued by companies to raise capital, come with specific features that you should understand before investing. Here’s a breakdown of the key features:
- Fixed Interest Payments: Corporate bonds offer regular interest payments, also known as coupon payments. These payments are typically made semi-annually or annually and remain fixed throughout the bond’s life.
- Defined Maturity Date: Each corporate bond has a specific maturity date, which is the point when the issuing company repays the principal amount to you. Maturity periods can range from short-term (a few years) to long-term (over a decade), depending on the bond type.
- Credit Ratings: Credit rating agencies, such as S&P, Moody’s, and CRISIL, assign ratings to corporate bonds. These ratings indicate the issuer’s creditworthiness and help you assess risk.
- Callable and Non-Callable Bonds: Some corporate bonds have a callable feature, allowing the issuer to repay them early, often when interest rates drop. Non-callable bonds, on the other hand, guarantee that you’ll receive interest payments until maturity.
Types of Corporate Bonds
1. Secured Corporate Bonds
These bonds are backed by specific assets of the issuing company. In case of default, investors can claim rights over the collateral.
- Risk: Lower than unsecured bonds
- Return: Slightly lower
- Example: Bonds backed by real estate or machinery
2. Unsecured Corporate Bonds (Debentures)
These are not backed by any collateral and depend entirely on the company’s creditworthiness.
- Risk: Higher than secured bonds
- Return: Higher interest to compensate for risk
- Used By: Mid to high-growth companies
3. Convertible Bonds
These bonds can be converted into equity shares of the issuing company after a certain period or on certain conditions.
- Benefit: Potential upside from stock appreciation
- Return: Lower interest than non-convertible bonds
- Ideal For: Investors who want debt + equity exposure
4. Non-Convertible Debentures (NCDs)
These bonds cannot be converted into shares and offer fixed interest throughout the tenure.
- Return: Fixed coupon income
- Popularity: Very common in India, often issued by NBFCs
- Available On: Stock exchanges, during public issues
5. Callable Bonds
Callable corporate bonds give the issuer the right to redeem the bond before maturity, usually after a lock-in period.
- Risk to Investor: Bond may be called back if interest rates drop
- Return: Slightly higher than non-callable to compensate
Risks Associated with Corporate Bonds
While corporate bonds offer attractive returns and regular income, they are not risk-free. Knowing the various types of risks associated with corporate bonds is essential before investing, especially if you’re seeking safety or planning long-term goals.
1. Credit Risk (Default Risk)
This is the most significant risk. It refers to the possibility that the issuing company may default on interest payments or may fail to repay the principal at maturity.
- High Risk in: Low-rated or unrated bonds
- Rating Factor: AAA is safest; lower ratings like BB, B, or below indicate higher risk
- Example: A financially unstable NBFC issuing high-return bonds may default during a liquidity crunch.
2. Interest Rate Risk
When interest rates rise, the market value of existing bonds falls because new bonds offer better returns.
- Impact: If you sell the bond before maturity, you may incur a capital loss
- Higher Impact On: Long-duration bonds
- Tip: Short-term bonds are less sensitive to interest rate fluctuations
3. Liquidity Risk
This refers to the difficulty in selling a bond before maturity at a fair price due to lack of demand in the secondary market.
- Common In: Bonds from lesser-known companies or low-volume issues
- Consequence: You may have to sell at a discount or wait for maturity
- Tip: Choose listed and frequently traded bonds to reduce this risk
4. Reinvestment Risk
When you receive periodic coupon payments, you may not be able to reinvest them at the same high rate, especially in a falling interest rate environment.
Tip: Consider zero-coupon or cumulative bonds if reinvestment is an issue
5. Inflation Risk
If inflation rises faster than your bond’s interest income, the real value of your returns decreases.
- Example: You earn 7% from a bond, but inflation rises to 8% — your net gain becomes negative in real terms.
6. Call Risk
If a bond is callable, the issuer has the right to redeem it before maturity, typically when interest rates fall.
- Disadvantage: You lose a high-yield investment earlier than planned
- Tip: Check the call schedule and call price before investing
7. Taxation Risk
Interest earned from corporate bonds is fully taxable as per your income slab under “Income from Other Sources.”
- High Tax Slab = Lower Net Returns
- Tip: Tax-free bonds or tax-efficient debt mutual funds may be better alternatives
8. Event Risk
Unforeseen events like company mergers, regulatory changes, scandals, or economic shocks can affect the issuer’s ability to repay.
- Example: A corporate scandal or fraud can erode trust and credit ratings, increasing the chance of default.
Corporate Bonds vs. Corporate Bond Funds
| Feature | Corporate Bonds | Corporate Bond Funds |
|---|---|---|
| Investment Type | Direct investment in a bond | Pooled investment via mutual fund |
| Diversification | Limited (usually one issuer) | High (10–50+ bonds) |
| Returns | Fixed, predictable | Market-linked, may vary |
| Risk | Credit, liquidity, interest rate | Market risk + interest rate risk |
| Minimum Investment | High (₹10,000 – ₹1 lakh+) | Low (₹500 – ₹1,000 SIP) |
| Liquidity | Low (may not sell easily before maturity) | High (can redeem anytime) |
| Management | Self-managed | Professionally managed |
| Taxation | Interest taxed as per slab | Capital gains tax (depending on holding period) |
| Suitable For | Experienced debt investors | New or passive investors |
How to Choose the Right Corporate Bonds to Buy?
Selecting the right corporate bonds requires careful evaluation to match your investment goals and minimise risks. Here’s how you can approach the process:
Assess Credit Ratings
Review credit ratings from agencies like Moody’s, S&P, and Fitch – these ratings indicate the issuer’s creditworthiness and ability to repay. Bonds with higher ratings (e.g., AAA or AA) are considered safer, while lower-rated bonds (e.g., BB or below) carry more risk but may offer higher returns.
Evaluate Interest Rates
Compare the bond’s coupon rate (fixed interest paid by the issuer) with current market rates. Bonds with rates above the market average may provide better income but assess if the higher rate compensates for potential risks, such as credit or inflation risks.
Understand Maturity Period
Choose bonds with a maturity period that aligns with your financial goals. For example, short-term bonds (1–3 years) are less affected by interest rate changes, while long-term bonds (10+ years) may offer higher yields but carry more price volatility.
Review the Financial Health of the Issuer
Analyse the issuer’s financial stability by looking at their balance sheet, profitability, and debt levels. Issuers with strong financials and low debt are less likely to default, making their bonds a safer investment.
Taxation of Corporate Bonds in India
1. Tax on Interest Income
When you invest in corporate bonds, the coupon or interest received is treated as “Income from Other Sources”.
- Tax Rate: As per your individual income tax slab
- Frequency: Interest is usually paid annually or semi-annually
Example: If you earn ₹10,000 interest and fall in the 30% tax slab, you pay ₹3,000 in tax. Your net return is ₹7,000.
Is TDS (Tax Deducted at Source) applicable?
Yes, if interest earned exceeds ₹5,000 per year from a corporate bond, TDS at 10% is applicable.
- You can claim a refund or adjust it while filing ITR
- Provide Form 15G/15H (if eligible) to avoid TDS
2. Tax on Capital Gains (if bond is sold before maturity)
If you sell your corporate bond in the secondary market before maturity, the profit (if any) is considered capital gains, and the tax depends on the holding period.
Short-Term Capital Gain (STCG)
- Applicable if bond is held for less than 36 months
- Taxed as per your income slab
Long-Term Capital Gain (LTCG)
- Applicable if bond is held for more than 36 months
- Taxed at 20% with indexation benefit
Indexation helps reduce taxable gains by adjusting purchase price for inflation.
FAQs
What are corporate bonds?
Corporate bonds are debt instruments issued by private or public companies to raise money. In return, they promise to pay regular interest and return the principal at maturity.
Are corporate bonds safe to invest in?
Corporate bonds are relatively safer than equities but not risk-free. The safety depends on the issuer’s credit rating. AAA-rated bonds are considered safest, while low-rated bonds carry higher default risk.
What is the minimum investment in corporate bonds in India?
The minimum investment varies but is generally around ₹10,000 to ₹1 lakh per bond issue. It depends on the company and the bond structure.
How are corporate bonds different from fixed deposits?
Corporate bonds usually offer higher returns than FDs, but they carry higher risk. FDs are insured (up to ₹5 lakh per bank), while bonds depend on the company’s credit health.
How do I buy corporate bonds in India?
You can buy corporate bonds through:
Stock exchanges (NSE/BSE)
Registered brokers or banks during public issues
How is interest from corporate bonds taxed?
Interest is taxed as per your income tax slab under “Income from Other Sources.” If the annual interest exceeds ₹5,000, TDS at 10% may apply.
Can I sell corporate bonds before maturity?
Yes, but only if they are listed and actively traded. However, liquidity can be low, and you may have to sell at a discount.
What is the difference between secured and unsecured corporate bonds?
Secured bonds are backed by collateral (e.g., company assets)
Unsecured bonds are not backed by any assets and hence carry more risk
What is YTM (Yield to Maturity) in corporate bonds?
YTM is the total return you will earn if you hold the bond until maturity, including both interest and capital gain/loss.
Are corporate bonds better than corporate bond funds?
It depends:
Direct bonds offer fixed returns but require larger capital
Bond funds offer diversification and liquidity but come with market-linked returns
Which is safer—corporate bonds or fixed deposits?
Fixed deposits are considered safer than corporate bonds, since they not only offer guaranteed returns, but also since they are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh per depositor. Corporate bonds do not have this guarantee even though they may offer higher returns. FDs are also backed by banks, making them safer than corporate bonds.
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.
