How to Invest in Bonds in India: A Guide to Corporate Bonds and Beyond

Bonds offer investors stable returns with lower risk than equities, making them ideal for diversification and portfolio risk mitigation. Understanding how to invest in bonds in India can help optimize your portfolio as well. But what kind of bonds should you invest in? Among the various bond types, corporate bonds stand out for their higher yields and benefits, while government bonds stand out for their safety and guaranteed returns.

Let’s understand bonds further.

Understanding Bonds and Their Role

Bonds are fixed-income securities through which investors lend financial support to an entity (government, corporate, or financial institutions) in exchange for periodic interest and principal repayment at maturity. They help in hedging your portfolio against market volatility and provide predictable income.

Out of the most popular choices, corporate bonds are emerging to become investors’ favorites. But what are corporate bonds? Let’s see.

What Are Corporate Bonds?

Corporate bonds are debt instruments that companies issue to raise capital for things like expansion, operations, or refinancing. In return, investors are paid regular interest, known as a coupon rate. This coupon rate varies based on the issuing company’s credit rating and the prevailing market conditions.

Types of Corporate Bonds

1. Investment-grade bonds are issued by big corporations, with lower yields compared to equities and reduced risk.

2. High-yield bonds, also known as junk bonds, offer higher returns than government bonds but carry greater risk.

3. Convertible bonds can be converted into shares, blending debt security with equity potential, giving investors the best of both worlds—stability with capital growth.

4. Perpetual bonds, offering no fixed maturity, provide investors with indefinite interest payments until the issuer decides to redeem or buy back their bonds.

How to Invest in Bonds in India

Investing in bonds in India is now simpler than ever. Investors have a myriad of options to choose from according to their risk appetite, strategy, and goals (short- and long-term).

1. Stock Exchanges

Corporate bonds are listed on both the NSE and BSE, where investors can trade them in the secondary market. NSE’s EBP (Electronic Bidding Platform) facilitates institutional bond purchases.

2. Direct Purchase from Issuers

Companies issue bonds through public issues or private placements. Investors can buy these bonds directly from the issuers via investment banks, brokers, or online platforms.

3. Bond Mutual Funds and ETFs

Investment that provides investors with exposure to corporate, government, and PSU bonds, bond ETFs and debt mutual funds suit a variety of portfolios.

4. RBI Retail Direct Scheme

Retail investors can buy government bonds via the RBI’s Retail Direct portal. While focused on sovereign securities, it offers a secure investment method.

Factors to Consider Before Investing

With a lot of options comes confusion. There are so many considerations to keep in mind while investing in fixed-income investments, some of the main ones being:

• Credit rating: You should check ratings from agencies like CRISIL, ICRA, or CARE to assess the potential of issuers defaulting on your bond payments.

• Interest rate trends: Rising interest rates can lower bond prices, affecting your overall returns. Focus on the market conditions, especially interest rate trends, before you make a decision.

• Liquidity: Corporate bonds may have lower liquidity than government bonds, so it is recommended that you check that the liquidity offered by bonds and your liquidity needs are aligned.

• Tax Implications: Different bonds come with different tax implications, so you should always assess the long-term tax liability and choose options accordingly.

Final Thoughts

Understanding how to invest in bonds is one of the first steps of your fixed-income investing journey. These instruments help stabilize your portfolio, diversify your investments, and provide regular returns.

Corporate bonds, in particular, are popular for their attractive returns, but since they carry a higher risk than government bonds, you need to carry out a careful credit assessment. By leveraging exchanges, direct purchases, and mutual funds, investors can effectively integrate bonds into their strategy.