Corporate Bond Funds are mutual funds or debt security that is sold to investors by a firm. These corporate bonds are a way for companies to get the money they need for short-term expenses like advertising, insurance payment etc. In return, the investor gets regular interests, which can have a fixed or variable rate. Once the bond matures, the investor is given back his original amount.
Bonds are evaluated and rated for their credit quality before releasing them to investors. The highest-rated bonds have less risk, but they have low interest rates. These are called ‘Triple A’ bonds. On the other hand, high-risk bonds usually have a higher interest rate to compensate for the high risk. These bonds are usually rated lower than AA.
However, the rating alone should not determine if you should buy corporate bonds. There are several benefits of investing in corporate bonds. So, if you are thinking about bond investment, let’s have a look at the benefits.
1. Less risky than stocks
Corporate bonds are much less risky to invest in than stocks. When you make a bond investment, you’re essentially lending money to the company, whereas when you buy a stock, you hold a percentage of equity in the company.
Stocks can fluctuate in value widely, and you can end up with a huge loss if the company loses money. Whereas with bonds, you can expect to get your payments as long as the company is running. Some companies even offer their physical assets as collateral, so you can expect to receive a part of your investment back even if the company goes under.
2. Higher interest rate
Corporate bonds are usually considered higher risk than government bonds. But to compensate for the higher risk, the interest rate is often significantly higher. You can expect a high return from your bond investments, enough to have a steady income.
Corporate bonds can offer you an average return of 8 to 10%. Government funds can offer only about half of this rate. As long you do your research properly and invest carefully, you can expect a good income from your corporate bond investments.
3. Regular interests
The number of interests on a corporate bond is pre-determined. So, you can expect fixed and regular payments from your bond investment throughout the bond period. That is why many people use bond investments as a regular form of income.
The interest rate can be fixed or varied depending upon several factors, usually an economic marker. So, the amount of money you will receive from your interest can also be fixed or varied. However, you are always guaranteed to have a minimum amount, so this is a reliable form of income. Unlike stocks, the interest will not become zero.
Firms issue corporate bonds for short-term financing needs. These bonds allow for greater security for the investors with high returns. So, the time period for most corporate bonds ranges between 1 to 4 years.
That also means that you won’t have to wait for years and years to get back your initial investment amount as an investor. So, even if you are unsatisfied with your investment, your money does not have to be stuck in one place forever.
5. Can be liquidated easily
If you want to sell your corporate bond, you can easily do so. The price of corporate bonds depends on a lot of factors, including the number of remaining interests and interest rates. However, the price of bonds is not nearly as volatile as stocks, so you can expect to get back a majority of your initial investment.
Since you can sell your bond anytime you wish, it offers greater flexibility with your investment. Like the last point, your money doesn’t have to be stuck in one place forever with bond investments.
Corporate bonds can be categorized by fund tenure and the credit rating of the company. These different categorizations allow several types of investors to invest in bonds that suit their investment goals or patterns.
Anyone who wants to invest can consider buying corporate bonds, whether they are a first-time investor or an expert in the industry.
The bottom line
Many companies prefer to use corporate bond funds to raise capital as they have a lower associated cost than loans. Although corporate bonds have a higher risk than government bonds, they also have a higher interest rate, making them attractive to investors.
There are different types of investors looking to buy bonds, and bonds are great for every type of investor. That is because several types of bonds are available, with varied risks and interest rates. It is always important to be smart about your investments, but overall, buying corporate bonds is a good way to make a steady income from investments alone.