Bond-o-Mania: Unravelling The Mysteries Of The Corporate Bond Market In India!

If you have been a savvy investor, you would be well versed in investments in mutual funds, stocks, insurance, and deposits. But have you taken a look at the opportunities available in the bond market? If predictable fixed income is an area of interest to you, then let’s dive into a primer on all that’s on offer.  

Investing in bonds is a prudent way to diversify your fixed-income portfolio. If you have a low-risk tolerance then bonds can be a good choice for you. The income from bonds is easily predictable, and it also preserves your capital. The interest received from bonds can supplement your primary income.

Over the years, there has been a steady increase in the investment options available in the Corporate Bond market. Both the nation’s central bank and the Securities and Exchange Board of India (SEBI) have taken a series of measures to make the market more transparent and inviting for retail investors. 

The Corporate Bond market has grown steadily in the last decade, with the outstanding stock increasing four-fold to INR 40 trillion in 2022, according to data from the Reserve Bank of India (RBI). Although when measured as a proportion to GDP, the size of the Corporate Bond market in India lags behind some Asian countries such as South Korea and China, it is a market that is growing steadily and shows potential.

In India, the Corporate Bond market offers numerous opportunities for investors to participate in debt instruments issued by established companies. This article provides a step-by-step guide on how to buy Corporate Bonds and help investors make informed decisions.

Assess Your Investment Goals And Risk Appetite

• Determine your investment objectives, such as income generation or capital preservation. 
• Assess your risk tolerance and choose Corporate Bonds accordingly.

Research Corporate Bonds

• Study the credit ratings provided by rating agencies like CRISIL, Fitch, ICRA, or CARE to evaluate the issuer's creditworthiness.
• Analyse the financial health, industry position, and track record of the company issuing the bonds.
• Understand the terms and conditions of the bond, including the coupon rate, maturity period, and redemption options.

Choose The Right Investment Platform

• Identify a reliable and regulated financial intermediary like an online bond providing platform (OBPP), bank, brokerage firm, or registered depository participant (DP).
• Ensure the platform offers access to the Corporate Bond market and facilitates bond transactions.

Monitor And Manage Your Investment

• Regularly track the performance of your Corporate Bonds. Stay updated on the issuer's financial health, industry trends, and credit rating changes.
• Evaluate the need to hold or sell your bonds based on your investment goals and market conditions.

Selling Corporate Bonds

• If you wish to sell your corporate bonds before maturity, contact your financial intermediary or use their trading platform.

Bond platforms are an efficient way to invest in these instruments. All you need is to open an account and complete KYC formalities. While the minimum ticket size varies across platforms, some platforms allow you to invest from as little as INR 10,000. These platforms offer a secure environment from where you can carry out the required transactions. However, before choosing a platform, do check out its reviews and do your due diligence.

Certain factors need to be considered before investing in bonds. Interest received from bonds is taxable and if you fall in the high tax bracket, your tax outgo may increase. While buying bonds, you must also ensure that the securities are of high quality. In other words, liquidity can be an issue with bonds that have a low credit rating. 

To make it simpler, here’s a cheat sheet for commonly used terminology in the bond market:

Fixed/Floating interest rates: A fixed-rate bond will pay you a fixed amount periodically as per the interest rate set out when the bonds were issued. A floating rate bond has its interest rate pegged to a benchmark rate. As the benchmark rate changes, the interest rate on the bond will vary accordingly.

Periodicity of interest payments: The interest may be received yearly, half?yearly, quarterly, or even monthly depending upon the period set at the time of issue. The interest payment dates are usually specified in the bond prospectus.  

Maturity date: Maturity date is the date on which the bond matures i.e. when the issuer repays the face value of the bond along with the accrued interest to the investor and dissolves himself of all the obligations attached to the bond.

Secured/Unsecured bonds: If the company in whose bonds you have invested is wound up, it is important to know where you stand when the company repays its debts. Bonds are either secured against assets or unsecured. If the bonds are secured, in the event of winding up of the company, it would sell off the assets against which the bonds were secured and repay the investor.    

Capacity of the firm to repay: When you invest in Corporate Bonds, you need to ensure the company is in a position to repay your principal and the interest due to you. Hence, you need to analyse the company’s financial health and track record well before investing in its bonds.

Convertible/Non-convertible bonds: Bonds that can be converted into equity shares at a later date are called convertible bonds and those that cannot be converted to equity are non-convertibles. 

Put/Call options: Some bonds have embedded options that either allow the issuer to buy back the bonds before maturity or the holder of the bonds to sell the bonds to the issuer before maturity. Such options are explicitly stated in the offer document at the time of bond issuance.

India has made impressive progress in the development of the Corporate Bond markets - the market is large and growing; the issuer base is expanding; product diversity and sophistication are developing; secondary market volumes are low but growing; and market infrastructure is among the best in the world. 

Conclusion

You don’t have to worry too much about doing it all on your own. Platforms such as Grip can help you evaluate bonds.  Sign up on Grip and weigh the potential benefits and risks of each investment and make your own decision based on your financial goals and risk tolerance.

If done right, bonds can help you diversify your portfolio with ease and act as a counterbalance to volatile and uneven returns from investments in equities.

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Happy Investing!

Disclaimer: This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer-related documents carefully.