Navigate AAA Rated Bonds in India 2024 - What Investors Need to Know

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Synopsis:

The bond market in India offers great investment opportunities for retail investors, particularly in the form of AAA-rated bonds. Such bonds are typically issued by the most reputed companies in India and offer a decent rate of interest to the investors.

Bonds are financial instruments that are used by the government and private companies to raise finance from investors. When an investor invests in a bond, he lends money to a bond issuer. In return, the issuer provides an interest income to the bondholder. Before investing, an investor should check the credit rating of the bond issuer.

Credit rating agencies provide ratings to bonds based on the creditworthiness of an issuer. The bonds of the most creditworthy companies are given an ‘AAA’ rating.

If you have just opened a demat account, then you should keep an eye on AAA-rated bonds because they provide a good investment avenue to retail investors. Recently, the Securities and Exchange Board of India (SEBI) gave its approval to reduce the minimum ticket size of investments in bonds from Rs. 1 lakh to Rs. 10,000.

Earlier, retail investors had to invest a minimum amount of Rs. 1 lakh in bonds, which reduced their participation in the bond market. Now that the minimum amount has been reduced to Rs. 10,000, more retail participation is expected. Read this blog to learn about AAA-rated bonds and how to find the best corporate bonds in India.

What are AAA-rated bonds and why are they important?

When a certain issue of bonds is rated AAA, it means that its issuer has the highest creditworthiness. This shows that the issuer of such bonds is most likely to pay the interest and principal due on bonds in time to the investors.

As a result, the investors can remain assured that their money is safe in the hands of the bond issuer. A bond investor is a creditor of a bond issuer. Needless to say, like any creditor, a bond investor remains concerned about getting his interest and principal payments from the issuer.

To deal with this, financial markets have a participant called credit rating agencies. For example, in India, we have several rating agencies like CRISIL, ICRA, CARE, etc. These agencies provide credit ratings to the issuer of bonds based on how likely they are to make the interest and principal payments in time.

For this purpose, credit rating agencies examine the operational and financial health of bond issuers. Based on the ratings provided to them, investors can decide whether they want to invest in certain bonds or not.

How to invest in the best corporate bonds in India in 2024?

If you want to invest in the best corporate bonds in India, you should follow these steps:

  • You should try to find AAA-rated corporate bonds in India to invest in. Such bonds are issued by companies with a very high creditworthiness.
  • For example, recently, CRISIL provided a rating of ‘CRISIL AAA/Stable’ to non-convertible debentures of Bajaj Finance.
  • For such updates, you should check the websites of credit rating agencies like CRISIL, ICRA, CARE, etc. You should also check the websites of top companies in India because such companies often issue highly rated bonds.
  • There is another way of investing in the corporate bonds in India. You can invest in corporate bond funds.
  • A corporate bond fund is a mutual fund that invests a minimum of 80% of its corpus in the bonds of companies with the highest credit ratings.
  • By investing in such mutual funds, you will be allowing a fund manager to invest on your behalf. As a result, you will not have to find bonds to invest in yourself, as it will be a passive investment.
  • That said, even if you are investing in a corporate bond fund, please ensure that its manager is not taking more risk than necessary.

How can you earn by investing in corporate bonds in India in 2024?

There are predominantly two ways to make money using corporate bonds. First, such bonds provide you income through the way of interest payments at regular intervals. Second, you can also make money on corporate bonds through capital gains in India.

When interest rates decrease, bond prices move up. Conversely, bond prices move down when interest rates increase. Let us explain this with an example. Suppose, you invested in a AAA-rated bond with Rs. 100 face value and a 7% coupon rate.

However, in a year’s time, interest rates decreased and now a AAA bond only offers a coupon rate of 6%. Since the bond you had invested in offers a higher coupon rate, its price will move up. If that happens, you can make a capital gain by selling your bond.

Conclusion

Investing in bonds can be rewarding. However, you should ensure that you invest in bonds with a high credit rating. If the credit rating of a bond is low, it means that the probability of its issuer not paying interest and principal amounts in time is high. So, you should avoid such bonds.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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