Many investors ask me how to buy corporate bonds without taking blind risk. The process is not complicated, but it does demand discipline. Below is the exact framework I use to evaluate and purchase corporate bonds, built for Indian investors who want clarity before committing capital.
1) Define the purpose and horizon
I start by writing down why I want bonds: income, diversification, or a specific goal like fees or retirement cash flow. Then I match the investment horizon to the bond’s maturity. If my target is three years, I avoid ten-year paper unless there’s a clear exit plan.
2) Shortlist by issuers and categories
Next, I filter the universe of corporate bonds by issuer type—PSU, leading private corporates, or well-run NBFCs—and by security (secured vs. unsecured), coupon type (fixed, floating, step-up), and features (call/put options). I prefer transparent issuers that publish crisp term sheets, audited financials, and regular disclosures.
3) Read the term sheet—line by line
This is where many people stumble. I review: security cover, seniority, embedded options, day-count convention, interest payment frequency, minimum lot size, and whether there’s a put/call schedule. I also note the settlement cycle and whether interest is paid via ECS directly to my bank account.
4) Convert price to yield and compare apples to apples
Quoted prices can be misleading; I convert everything to Yield to Maturity (YTM) to compare bonds with different coupons and maturities. I stress-test the YTM for realistic scenarios—what if I need to sell in a year and interest rates are 50–100 bps higher? A quick break-even analysis helps me understand the impact of rate moves.
5) Assess risk, not just return
Credit risk: I look at external ratings and the issuer’s leverage, interest coverage, and cash-flow stability. I treat ratings as a starting point, not the destination.
Interest-rate risk: Longer maturities are more sensitive to rate changes; I balance duration with my comfort level.
Liquidity risk: I check traded volumes, outstanding size, and whether the bond is commonly quoted on exchange RFQ platforms. Lower liquidity means wider bid-ask spreads when exiting.
6) Choose the right execution venue
For most retail investors wondering how to buy corporate bonds, a SEBI-registered Online Bond Platform Provider (OBPP) offers transparent pricing, standardised disclosures, and simple execution to a demat account. One can also transact through registered brokers or on exchange RFQ routes. I favour platforms that show all-in YTM, live quotes, and complete fee breakdowns before order placement.
7) Complete KYC and place the order
A valid PAN, demat, and bank account are essential. I place a limit order at my desired yield rather than chasing price. After execution, bonds typically credit to my demat, and future interest payments follow the published schedule. I store the contract note and term sheet for records.
8) Plan taxation and monitoring
In India, coupon income is taxed as per slab. Capital gains depend on the holding period and listing status. I maintain a tracker for coupon dates, step-up clauses, and potential call dates so I am never surprised. A quarterly review keeps the portfolio aligned with my goals.
If you’ve been searching for how to buy corporate bonds, the message is simple: treat it as a process, not a punt. Start with purpose, insist on documentation, compare by YTM, and respect risk. With this approach, corporate bonds can play a measured role in a diversified portfolio. And if you’re still asking how to buy corporate bonds in a way that balances prudence with clarity, use regulated venues, read the fine print, and let your checklist—not market noise—guide every decision.