How to invest in corporate bonds in India?

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interest rate hikes, ever! The immediate impact? Bonds lost in double digits. The returns they made in over a year were wiped out in a span of weeks. For instance, the Total Bond index, which tracks the US investment grade bonds, marked 2022 as its worst year on record going back 250 years.

The good thing was this aggressive action by central banks created one of the best buying opportunities for bonds in the past two decades. The situation is similar right now as well. We now have positive real yields and both government and corporate bonds offer more than 8% interest rate.

The cherry on top is that if central banks, more importantly the Fed, manages to bring inflation back under control and cut rates, bond funds can possibly make a strong comeback. Keeping that in mind, this is the perfect time to take a deep dive into the bond market and understand how to invest in corporate bonds in India. Bonds serve as a method for a company or government to raise funds for their initiatives.

By purchasing a bond, you are lending money to the issuer, who in return agrees to pay you a predetermined rate of interest throughout the bond's duration and to return the bond's principal value upon its maturity. To simplify this, let’s consider a hypothetical example… Suppose on the day of purchase, you give ₹100 to the bond issuer. Over the next 10 years, the bond issuer will give you ₹10 every year as the coupon payment, and at the end of 10 years, you receive the initial ₹100 you used to purchase the bond.

So every year, you get a fixed-income from your ₹100 investment. This is the reason why bonds are considered less risky than stocks. That is if the issuer does not go bankrupt.