- Are Corporate Bond Best for Short Term Investment?
- What are the Types of Investments?
- Few points we must need to keep in mind for Short-term Investment
- Corporate Bonds
- What are corporate bonds?
- How much Returns do Corporate Bond Give?
- What is the Risk associated with Corporate Bonds?
Are Corporate Bond Best for Short Term Investment?
What are the Types of Investments?
Whenever we talk about the investment that are three modes of investment one is your emergency fund which covers your monthly needs rent food electricity daily necessities and daily expenses this fund must ideal cover all expenses for 6 to 12 months and this one must be used during the time of Emergency.
Now, Where do you must save this money? you can save this money by doing an FD fixed deposit as this is your emergency fund even if putting in FD you may get 5% to 8% of Return on it.
On the other hand this money will be very much safe and the reason why savings account is not suggested is that a savings account nearly gives you 2% to 3% of Returns which is not ideal.
Long term investment
Long-term investments are for the use expenses in your life according to many experts who have often spoken about it the best way to invest is in the stock market.
The stock market can give you the approximate return of 15% to 18% for a long-term whereas in short term the choppiness or daily fluctuations in the market are even out on an average but this to do not take into account a very important category of investment and that is a medium-term investment
Short term investment
Suppose You are 20 to 25 years of age and you started investing but you know that at 28 to 29 years of age you are going to get married using your own money or You are around 20 to 25 years old and you want to do an MBA program at the age of 28 to 29 so you want to invest for that.
Now if you look at the investment of 1 to 4 years of investment then putting money in an FD is like burning the money because it cannot beat the inflation investment in the stock market will also be not a good option because the stock market for a short term is very unpredictable.
During the Covid crisis in initial days the market touched it Rock bottom but after few months it’s slowly appreciated and reached its pic later on it fall again
Few points we must need to keep in mind for Short-term Investment
- Good Returns
- Maintained Risk
Good return means it should beat the inflation and also create an Asset where risk is managed or maintained. This can be done by the mean of an asset called corporate bonds
Corporate bonds are a smart way for you to take care of all these three things it can give you a short-term investment strategy through which you can invest for 1- 4 years.
Secondly, the predictable returns because there are fixed income and if you choose the correct corporate Bond then you can also do a good job of mitigating or balancing the risk
What are corporate bonds?
For example, consider XYZ company wants to raise the money XYZ company has got a big project and this company needs 1000 crores now in this Scenario XYZ company as two options.
They can sell the stocks and generate a thousand crores but for that, they need to issue new stock in the market which is not always easy and at the end of it Company is giving Companies Ownership or Equity to someone else which Companies may not want to do.
The second solution to this problem is that companies can take Loans and taking Loans is a very normal thing for Big Companies in fact it is a part of their Corporate Finance Strategy.
There are two ways Companies can take loans firstly by going to the bank or Secondly by issuing the Bonds called The Corporate Bond.
In simple words, a Corporate Bond is an announcement saying that Companies want to raise a certain amount of money so whoever is ready to invest their money in a Bond, Companies will sell them the units of this bond.
Due to which two things can happen, First Individual will get a return on the money that they have Invested by getting the principal amount for example if an Individual invested 10000 Rs. then That individual will get back 10000 with the interest on that loan.
For the longest time, this corporate Bond was limited to Big Investment Companies like HNI’s, and non-Banking Financial Institute (NBFCs) since they are huge in size and can take the corporate bond as a whole instead of in pieces.
Companies also didn’t want to think about How many people will we give these bonds? They also need those people who don’t trouble too much? So far and so forth, That’s used to be with the large player themselves but what happened is gradually it has started coming to the retail investor and now there are some Sources through which an individual can invest in those bonds.
How much Returns do Corporate Bond Give?
These Bond are issued for the tenure of 1 to 4 years and will give you a fixed rate of return which is anywhere between 9 to 11% whereas an FD can merely give you 5% when compared with Corporate Bonds you may get 4 to 6% more and these Returns are fixed and assured over a period of 1 to 4 years but it has some risk involved with it.
What is the Risk associated with Corporate Bonds?
Major is associated with any Corporate Bond
Credit Risk means the money of an Investor has invested in the company will not get the money back or Company May Default. Why? The reason for that is that the company will shut down.
For Example, XYZ company raises 1000 crores but for whatsoever reason, the project didn’t work out the company tanked whatever the case may be then an Individuals Investments goes from 100% to 0% instant.
This never happens in the stock market it is very difficult for this thing to happen in the stock market but in the case of Corporate Bonds, it instantly goes to zero if the company defaults
So How is that mitigated?
First of all the loan amount is supposed 1000 crores so we should need to see if the collaterals kept against the is of thousand crores or not? So one must verify that at least 120% to 125% is collateral this means if the loan is of 1000 crores then the collateral must be 1200 to 1250 crores.
Quality of collateral
For example, if a person is buying the corporate bond of XYZ company then the collateral against The Corporate Bond is 1200 crore then its quality must be examined.
The Asset of XYZ company is really worth 1200 crore or not? Are those assets are the determined assets which literally means they have made a checklist and said these ABC machines are of 100 crores or the particular land at this Location is of 500 crores & etc.
In that case, They are Determined Assets, or is it just assurance and this is the Big Quality Check of Corporate Bond.
Lack of liquidity
These Corporate Bond cannot be redeemed Midway. So In case of an Emergency if you would need this money an Individual can’t say you need the money then this is your Principal with interest on the term.
People have to go through the locking period this is why please never use corporate Bond in the form of the emergency fund because an emergency fund by definition is for an emergency it can happen anytime and a person doesn’t want to be caught without money and that point of time.
Fraud means If a company commits this is are the collateral is that rally true collateral or do they just lie to you.
For example, If Company said the land which they kept as collateral is worth 500 crores but this land never existed or the valuation was faulty.
So that again has to be something that you rely on the due diligence and the quality check
All these three things credit risk, liquidity, and fraud risk must be ensured before investing in corporate bonds
If you are assured about the following associated risk with these corporate bonds and you have done your research then you can easily invest in corporate Bond.
There are various platforms that can do this thing for you and is a great way to make your short-term investment investing in corporate bonds is a phenomenal way to park your money.
Of course, you have to diversify your investment, some in corporate bonds some in equity so you can get a happy mix
Investment in corporate bonds is not risk-free and there is risk associated with it please be careful before investing in these kinds of funds
What is the Risk associated with Corporate Bonds?
1. Credit Risk:
Credit Risk means the money an investor has invested in the company will not get the money back or Company May Default.
2. Quality of collateral:
Quality of Collateral means the Collateral kept against the Bond must be worth 20% to 25% more than the amount and must be Determined
3. Lack of liquidity:
Corporate Bonds come with Fixed Lock-In Period which means An Investor cannot Redeem the Investment in Midway.
4. Fraud risk:
Fraud Risk means that the company has committed 120% to 125% as collateral on paper but on the ground, there is no such Collateral or the value of Collateral are artificially Inflated.
What are the Types of Investment?
The objective of this fund is to use this fund in case of an emergency. Must be kept in FD. Must cover 6 -12 months of Daily Expenses.
Short Term Investment:
The money which Investors may require after a period of 1 to 4 years. Corporate Bonds are best for this Investment as to get approx 11% of Returns or Other Debt instruments
Long Term Investment:
This money will be invested for a long period of around 15 to 20 years The stock Market is the Best Place for this investment as it reduces the regular Choppiness of Market
Difference Between FD and Corporate Bonds?
Fixed Deposits (FD):
– It is Fixed Income financial Instrument.
– Return on FDs Ranges between 4% to 5%.
– No Risk Involved.
-They are Debt Security Instruments
– Return on Corporate Bonds Ranges between 9% to 11%.
– Few Risk Involved such as Credit Risk, Quality of collateral, Lack of liquidity, Fraud risk.
Things to Consider before making Short-term Investment?
1. Predictability: The Returns on the Investment must be Predictable. The returns must not be Volotile as in Stock Markets
2. Good Returns: The Return On Investment (ROI) must be Good when compared with Inflation & other Factors
3. Maintained Risk: The Risk On Investment must be Maintained or can be Mitigated by Making some informed decision.
Reference: SEBI (Security and Exchange Board of India)