Do you know what is the biggest question confronted by an investor?
And if you have been investing or are looking forward to investing, then you too would have faced the same question or dilemma.
Well, just wait a second as I would let you know about that biggest question.
In fact, the biggest question for any investor states or rather asks, “Is the investment safe for me?”
Yes, every investor looks for safe investment options. Whether you are a small investor or a big time player, you want to keep your money safe as well as definitely like to grow your money by getting decent returns on the sum of money invested by you.
So if, you too are an investor, your primary task is to search for a safe investment option that keeps your money safe and yields reasonable rate of return.
As a matter of fact, although you have a number of investment options at your disposal, but each and every investment option cannot be considered safe from an investment point of view. For example, if you have a low risk appetite, than going for investment in the stock market is not a viable investment option for you.
Likewise, there is a hot debate about whether Corporate Bonds are a safe investment option or not.
Here, we put forward our point of view about the safety and riskiness of investing in Corporate Bonds. Firstly, it may seem that investment in Corporate Bonds is safe, but in reality you need to analyze the factors affecting investment in Corporate Bonds.
So if, you are thinking of adding Corporate Bonds in your investment portfolio, then do consider the following factors before making the final choice.
Before we move on to discuss whether Corporate Bonds are a safe investment option, you should be clear about what are Corporate Bonds are and how do they operate or function.
So, firstly some words regarding Corporate Bonds.
As you would know, Corporate Bonds are debt securities, which are issued by a corporation or company. It is a kind of bond which is issued by a company. Corporate Bonds are different from Government Bonds as they tend to be riskier and pay high rate of interest to the bond holder. Corporate Bonds usually have a maturity period which can range from anywhere between one to thirty years.
The bond holder is entitled to receive interest payments and the principal amount at the end of the maturity period. The interest is usually taxable. Corporate Bonds are less risky than stocks as the issuing company first has to clear its debts, which also includes bonds, before paying any amount to the stockholders. Depending on the financial health of the issuing company, Corporate Bonds can be rated differently and yield different rate of returns to the holders. Corporate Bonds can get ratings such as AAA, AA, junk bond rating, or other kinds of rating depending upon the level of risk held and the rate of return.
So, now you would have got a good understanding about the nature and working of Corporate Bonds.
It is the right time to consider and analyze the factors which affect investing in Corporate Bonds. This would help you to answer all important questions – Are Corporate Bonds Safe Investment Options.
Here, we list down certain important points which you should follow before finally investing in Corporate Bonds.
Hence investing safely in Corporate Bonds will depend upon:
1. The kind of Corporate Bonds you choose to invest
There are different types of Corporate Bonds. The types are determined by the level of risk associated with them and the rate of return offered by them. So you need to pay attention to the type of Corporate Bonds you are buying. Suppose when you are buying high-yield bonds you are taking more risk as compared to when you buy high grade corporate bonds which have a low risk of investment and pay you less income. So with low risk and low return Corporate Bonds, you are making your investment safe.
2. The Company that issued the Bond
Well, ultimately the safety of Corporate Bonds depends upon the company which issues the bond. So if, the company is secure and has sound and sustainable business model, you can come to a conclusion that it is likely to meet its obligation of paying the bond holders their interest and the principal sum at the time of maturity of bonds. Thus, if you are holding bonds issued by General Electrical Company (GEC), which are investment grade bonds, you are definitely increasing the safety net of your investment in Corporate Bonds.
3. Buying Individual Bonds or Bond Funds
With respect to Corporate Bonds, you can either go for buying Individual Bonds or you can buy Bond Funds. Individual Bonds expose you to a higher risk as compared to Bond Funds. If the company defaults, you are at the risk of losing the whole of your invested money. So buying Individual Bonds of a single company is not a safe investment option as far as investing in Corporate Bonds is concerned.
Whereas you spread and dilute the risk of investment, by buying bonds of different companies at once when you buy Bond Funds. Thus if, one or two companies fail to perform, you still end up making money. Though Bond Funds are safer than Individual Bonds, they come at an extra cost in the form of annual charges.
4. Consider the Time Factor
In order to reduce the risk of investment in Corporate Bonds, you can go for short or medium term bonds. The time period may range from a year and can go upto five years. Usually, you can analyze, research and somewhat predict the financial and business health of the bond issuing company over a short period of time, say one or two years, which in case of certain companies may even go upto five years. By doing this, you make sure that your investment is safe, and the company will most likely not default in this period. So you’re principal, and interest payment is almost assured. Time horizon of say ten years or more, is certainly a riskier proposition, as accurate analysis for such a long period is almost impossible. So consider the time factor and prefer short or medium term corporate bonds.
5. Risk of Inflation
The rate of inflation has a direct impact on the value of cash flows generated on the liquidation of Corporate Bonds. Market Conditions may increase the inflation rate thereby reducing the real value of the fixed cash flows that you would receive on the maturity of the Corporate Bonds. So you have to take the risk of inflation into account while investing your money in Corporate Bonds.
6. Risk of Liquidity
You may be undergoing such financial condition when you require selling off the Corporate Bonds before the date of maturity. Liquidating Corporate Bonds is not easy as there is not a continuous secondary market for Corporate Bonds. So as an investor, you may face difficulty in selling your Corporate Bonds (before the maturity date) at a fair amount.
Some of the other risks associated with investing in Corporate Bonds include Supply Risk, Credit Spread Risk, Interest Rate Risk, Tax Change Risk, etc.
Thus, you see that investment in Corporate Bonds involves risk. However, you can greatly reduce the risk of investment in Corporate Bonds by taking care of the factors listed above. You certainly cannot make the risk zero, but can surely reduce it to a large extent.
Hence do not be in a dilemma that, “Are Corporate Bonds Safe Investment Options?”
On the contrary, make your investment in Corporate Bonds safe by using the points listed above so that your investment turns out to be profitable for you.