Types of Corporate Bonds in India & How to Choose the Right One

Imagine staring at a screen filled with several investment options, and all promise to deliver great returns and stability. Confused, right? You are not alone; many investors experience this dilemma. The solution is simple: Choose corporate bonds!

A simple and smart choice to earn a steady income while enhancing the growth of established companies, corporate bonds come in many types. With different levels of risk, reward, and maturity period, the right choice can make all the difference in elevating your investment portfolio. So, read this blog to explore the main types of corporate bonds in India, alongside the tips to choose the best option for your financial goals. 

Corporate Bonds in India: The Key Types

Corporate bonds are classified according to security, duration of tenure, and the repayment form. Here are a few of the different types of corporate bonds:

1. Secured Corporate Bonds

Secured bonds are supported by the physical properties of a company, like property, equipment, or receivables. Bondholders are entitled to claim these assets in case the issuer defaults legally. It is a security feature that makes them a safer investment than unsecured bonds.

• Example: A manufacturing firm, promising its plant or warehouse as security.
• Risk level: Low to moderate.
• Return potential: A bit lower, since there is the added security.

2. Unsecured Corporate Bonds (Debentures)

Debentures are unsecured bonds, which lack any collateral support. The investors are only relying on the financial health and creditworthiness of the issuer. They comply with secured creditors in the order of payment in the event of default.

• Example: An IT company borrowing an unsecured debenture to grow.
• Risk level: Moderate to high
• Return potential: Greater than secured bonds, to compensate for greater risk.

3. Convertible Bonds

Similar to regular bonds, convertible bonds allow the investor to convert their bond to shares of the firm after a set time. They have the characteristics of both debt and equity, with interest income in the early days, and a possible increase in value in the latter days.

• Best suited: Investors who want to balance between growth and income.
• Risk level: Moderate
• Return potential: Can be substantial when the stock of a company is successful.

4. Non-Convertible Bonds (NCDs)

Non-convertible debentures are held in their pure form during their tenure. They are not transformed into equity shares and generally have more fixed interest rates. NCDs are often issued publicly in various companies and thus available to retail investors.

• Risk level: It is different depending on the credit rating of the issuer.
• Return potential: Determinable and certain

5. Callable Bonds

• The issuing company has the ability to redeem callable bonds prior to the maturity date. This usually occurs when the interest rates drop and the company refinances at a cheaper rate. Though this is good for the issuers, it can constrain the returns of investors.
• Example: A 10-year callable bond that the firm redeems in 6 years.
• Risk level: Moderate
• Return potential: Can decrease in case of early call.

6. Puttable Bonds

• Unlike callable bonds, puttable bonds provide the investor with the option of early redemption at a predetermined maturity date. This aspect cushions the investor in case there is an increase in interest rates or the credit quality of the company deteriorates.
• Ideal: Risk-averse investors who want flexibility.
• Risk rating: Low because investors control it.
• Return potential: Moderately lower because of increased security.

7. Perpetual Bonds

• There is no maturity date for perpetual bonds. The interest is paid by the issuer until the issuer decides to redeem them. Banks usually issue them as a way of strengthening their capital base.
• Examples: Perpetual bonds of large banks in India to fulfill Basel III requirements.
• Risk level: High risk, as investors might not get back the principal at all.
• Repayment interest: High interest rate because it is long-term.

8. Zero-Coupon Bonds

Zero-coupon bonds are not provided as periodic interest-paying securities. They are, instead, sold at a big discount and redeemed at face value on maturity. The difference is the profit of the investor.

• Example: A bond that is bought at 7,500 and redeemed at 10,000 in 10 years.
• Risk: Moderate to high, depending on who is issuing it.
• Return potential: It is high, but returns are only realised at maturity.

Credit Ratings: What They Mean for Investors

The credit rating of any corporate bond must be reviewed before investing in it. Credit rating agencies like CRISIL, ICRA, CARE, and India Ratings and Research determine the capacity of a company to fulfill its debt.

Ratings are a short-term view of risk; the better the rating, the less the risk of default.

• AAA: Highly Safe 
• AA: Moderately Safe
• A: Safe
• BBB: Acceptable Risk
• BB and Below: High Risk
• D: Default

Ratings are not fixed; there is also an upgrade or downgrade of the ratings based on the performance of the company. This is why investors ought to keep track of updates to ratings on a post-investment basis.

Further, SEBI requires issuers to fully disclose all pertinent information to rating agencies in order to provide transparency and protection of the investors.

Safety, Regulations, and the Role of SEBI and RBI

Safety of corporate bonds in India? Yes, it is subject to the financial health of the issuer, the market, and the regulatory supervision.

1. SEBI’s Role

SEBI regulates the issuance and trading of corporate bonds to bring in transparency and fairness. Key SEBI measures include:

• Mandatory disclosures: Bonds require firms to disclose information on the terms of the bond, riskiness, and financial position.
• Credit rating requirement: All SEBI approved bonds should be rated by a qualified rating agency.
• Listing norms: Listed company bonds are listed on stock markets, and this gives investors liquidity.
• Electronic bidding facility: It was introduced in primary bond issuances to bring about transparency.

2. RBI’s Role

The Reserve Bank of India (RBI) controls the general debt market and provides systemic stability. Its laws shape the interest, liquidity, and accessibility to the market. RBI also establishes standards for banks and financial institutions that invest in long or short-term corporate bonds.

Investor Safety Mechanisms

• Trustee monitoring: A trustee (typically a bank or financial institution) is installed to protect the interests of the investors and provide compliance.
• Debenture redemption reserve: Companies are obliged to have a RBI regulated bond redemption reserve fund.
• Regulatory audits: SEBI and auditors conduct regular inspections to make sure that all are in compliance.

Although these protections enhance the bond market, investors have to evaluate company fundamentals and creditworthiness before investing independently.

Factors to Consider When Choosing Corporate Bonds

When choosing from the different types of corporate bonds, a balance is needed between the return expectation and risk tolerance. The following are the main steps to take to select the safest corporate bonds:

1. Evaluate Your Investment Objectives

Decide whether you are interested in regular income, capital protection, or long-term growth. For example:

• As long as you need a regular place to earn income, you should select AAA-rated NCDs, investment-grade corporate bonds, or secured bonds.
• If you can take a moderate risk to get higher returns, then look at convertible or perpetual bonds.

2. Assess Financial Health and Credit Rating

Credit rating, the financial performance, risk levels of corporate bonds, and the payment history of the issuer - everything should be carefully checked. Bonds with a rating below BBB? Avoid them as they are considered speculative or highly risky.

What more? Check financial statements, debt-to-equity ratios, and trends in profitability. Firms that have stable and regular cash flows have higher chances of honoring payments.

3. Learn the Bond Features

Callable, puttable, and convertible - learn these terms. The reason? They affect liquidity, yield, and risk.

• Callable bonds can restrict the potential to increase.
• Puttable bonds increase security.
• Convertible bonds have a growth potential, but they are subjective to market volatility.

4. Compare Maturity Periods and Interest Rates

The rule? The longer the maturity of corporate bonds, the higher their interest rates are supposed to be for time-related risk. But when the interest rates increase, the duration of the high-yield corporate bonds in India can be lower. What about bonds with shorter terms? They have lower returns but lower interest-rate risk.

5. Diversify within Issuers and Sectors

Do not put all your money into one firm or industry. Expand the industries such as banking, energy, manufacturing, and infrastructure to minimize the concentration risk.

6. Check for Liquidity

The listed corporate bonds can be sold more easily by utilising the secondary market, like NSE or BSE. Non-listed bonds are, however, hard to sell prior to maturity. In case you require money sooner, choose the NCDs listed types of bonds in India with the active trading volumes.

Conclusion

Corporate bonds in India are also gaining popularity with investors who are looking to get a balance between safety and yield. The market provides different types of corporate bonds, including secured and convertible bonds, perpetual and zero-coupon bonds, allowing users to customise the risk profile to any millennial.

The secret of effective bond investing is to know the bond structure, the credit-rating analysis, and purposeful investment according to financial objectives. Regulations of SEBI and RBI should always be your safety net, and you should also depend on reputable rating agencies.

This combination of informed research and disciplined risk assessment will enable investors to recognise the strength of corporate bonds in creating a stable and income-generating portfolio - the type that will increase consistently without being affected by the ups and downs of the stock market.

My Mudra plays a crucial role in simplifying this investment journey. The platform connects investors with the right financial products, including corporate bonds, to match their risk appetite and income goals. With expert guidance and trusted partnerships, My Mudra helps individuals make smarter, well-informed investment decisions.

Also Read:
- Best Bonds for Investment in India
- How to Buy Corporate Bonds in India (Complete Beginner’s Guide)