The corporate bond fund is money raised by a corporate organisation by selling out bonds. The money is raised to support projects, for mergers and acquisitions, or to expand the business. These are considered open ended income schemes which aim to invest in high yield corporate bond securities based on strong credit research & evaluations. By investing in Corporate Bond Fund, one seeks to generate superior returns at acceptable levels of risk. The maturity time for the bonds are never less than a year, and the promise is that of high interest or affixed income from the invested money. The period for maturity varies from company to company, in between 1 year to 7 years. Your interests from the investments depend not only on the amount you have invested but also on the term you are willing to invest.
- How it works
Corporate bonds are certificates of debt that are issued by companies to raise money. If you are buying bonds, you are lending money to that company. In return, you will get an IOU which after a certain timeframe will get back your invested money in full. The bond contains a coupon with the amount of interest you are entitled to, and you will keep getting the amount as long as you retain the bond provided the company does not go bust, or there are no changes in policies. The companies also have provisions for early repayment if prevailing rates change, or the investor can withdraw it before maturity but that too only after a given period has elapsed.
- Why are corporate bonds sold?
It’s a form of debt financing or if we can say another form of investment just like equity, bank loans and lines of credit. It is important to understand that a company can sell bonds only when it has some consistent earnings potential to be able to offer debt securities to the public at favourable coupon rates. If a company has high credit quality, then it can issue more debt at lower rates.
- Difference between corporate bonds and stocks
As an investor, while buying stocks you are purchasing a part of the company, but in the case of corporate bonds you are lending out your money. The value of the stocks is subject to market risks. The price increases or decreases with the value of the company. The investors earn a profit as well as succumb to losses when the stock price depreciates. In the case of bonds, investors earn only a certain amount of interest and no profits. On the up side if the company goes bankrupt then the bond holders along with other creditors are paid in full before any payment is made to its stockholders. The same fact makes bonds safer than stocks.
Before investing, the market must be researched well. If the company does not do well, you may not be getting back the amount you spent unless you hold an individual bond. Similarly, you will get a solid income return if the company does well. Hence, invest wisely.