A corporate bond is a type of debt security that is issued by a firm and sold to investors to raise financing for a variety of reasons.
When it comes to investing in less risky or risk-free instruments, there are numerous alternatives available to investors. One of them is to add corporate bonds to the portfolio.
Understanding Corporate Bonds and Its Investment
A corporate bond is a type of debt security that is issued by a firm and sold to investors to raise financing for a variety of reasons such as to promote ongoing operations, M&A, or to expand the business. Investment in corporate bonds can be done in two ways. First, an investor can buy individual corporate bonds through a broker. The second option is to go via mutual funds or exchange-traded funds (ETFs).
For investing directly in individual corporate bonds, the investor should have top to bottom knowledge of the fundamentals of the issuing company. This helps the investor to ensure that they don’t buy it at risk of default. In case of corporate bonds, the risk of default has been uncommon; however, it shouldn’t be ignored at the time of making investment decisions.
To avoid the hassle of getting into an analysis of fundamentals of the company, one can invest through alternatives such as mutual funds or ETFs that focus on corporate bonds as it gives benefits in the form of diversification and professional management. The risk associated with this investment option differs from the risk involved in purchasing individual bonds. Investing in corporate bonds makes it easier for the investor to analyze as the investor is required to check only the holding of that specific fund to decide whether or not one should purchase it. For example, if an XYZ scheme is 100% holding in AAA corporate bonds, then less data is left for an investor to affirm before investing.
Who Should Invest in Corporate Bonds?
A corporate bond is a fixed income instrument ensuring regular fixed income and has lower risk sensitivity. These bonds are ideal for risk-averse people who want high returns on their fixed income investments when compared with other fixed income instruments. But, an investor should purchase corporate bonds only if they have the knowledge and ample time to analyze a company’s fundamentals and other risks associated with a bond investment. Otherwise, one should go with other investment routes accessible to them as investors such as through mutual funds where you actually appoint professionals to do the risk assessment on your behalf and keep an eye through continuous management of the same.
Advantages of Corporate Bonds
1. Higher Yields
Corporates usually offer higher yields than comparable-maturity government bonds or CDs. This high-yield potential is, however, generally accompanied by higher risks.
2. Dependable Regular Income
People who want steady income from their investments, while preserving their principal, may include corporate bonds in their portfolios.
Corporate bonds are evaluated and assigned a rating based on credit history and ability to repay obligations. The higher the rating, the safer the investment as measured by the likelihood of repayment of principal and interest.
Corporate bonds provide an opportunity to choose from a variety of sectors, structures and credit-quality characteristics to meet your investment objectives.
If you must sell a bond before maturity, in most instances you can do so easily and quickly because of the size and liquidity of the market.
If you are an investor and looking for a fixed income scheme to invest for medium to long-term horizon and don’t want to take too much risk on your investment, corporate bonds are the best option for you, means of investment may depend on your knowledge and expertise. In simple words, if you want to invest for a medium term without thinking about the market conditions and also have a moderate risk profile, you may add corporate bonds in your portfolio.
(By Palka Chopra, Senior Vice President, Master Capital Services)