With rising interest rates, corporate bonds offer a much higher rate than term deposits. Consider this: while corporate bonds offer an interest rate of up to 13%, fixed deposits offer an average interest rate of only 5-6% for terms of one to three years.
“Corporate bond rates or yields vary between approximately 7% and 13% depending on the rating, issuer and various other factors that determine the price of a corporate bond. A few corporate bonds worth mentioning include Piramal offering 11-11.50%, L&T offering 7.50-8% and Shriram offering around 8.50-9.5%. return on investment,” said Ankit Gupta, founder of BondsIndia.com.
While investing in bonds, one should be aware of the interest rate cycle and the maturity of the securities. Indeed, the interest rate and bond prices are inversely correlated. For example, if you hold a long-term bond with an interest rate of 10% and the interest rate rises to 12%, the value of your bond will decrease. The change in the price of the bond is based on the movement of interest rates. The longer the duration of the bond, the greater the impact on the price of the bond. But if you stay invested, at the end of the term, you will get the coupon rate that was locked in when you bought the bonds.
Is it a good time to invest in corporate FDs? “No, now is not the right time to invest in corporate term deposits. Corporate bonds offer better yields than corporate term deposits. It is always better to buy corporate bonds rather than corporate FDs for three main reasons: first, it gives you relatively higher yields, second, it is the advantage of liquidity to liquidate your position whenever you want, and thirdly, that’s the benefit of a corporate bond loan,” Gupta said.
How are corporate bonds taxed? There is a probability of capital gain/loss if the bonds are sold in the secondary markets before the end of the term. For the interest portion, the taxation of corporate bonds applies according to the rates of the individual tax slab.
With interest rates skyrocketing, it looks like it’s time to buy corporate bonds, Gupta said.
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