Introduction

The primary aim of investing is to earn profits. One lucrative avenue available to achieve this motive is investing in high-yield corporate bonds. These bonds, also known as junk bonds, pay a higher rate of interest than regular investment-grade bonds. However, they come with a lower credit rating and are often given a below “BBB” rating by S&P and Fitch.

Don’t be misled by the term “junk” bond because they are anything but that. Companies issue high-yield bonds when they cannot secure the ratings needed to issue investment-grade bonds. In a way, they come with a greater risk because usually the issuing companies have a weak credit profile, are part of a high-risk industry, have minimal operational history, are undergoing expansion, or have high debt. To compensate for the higher risk that investors are exposed to, these bonds come with higher interest rates.

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However, adding them to your portfolio not only results in diversification but increases the chances of earning a higher return than regular bonds. Since the reward is higher, the risk involved is on the higher side too. That said, with the right information, adding them to your portfolio can be a smart investment decision.

In this article, you will be introduced to everything related to high yield corporate bonds; from their benefits and features to tips to investing in them.

Benefits and Features of High-Yield Corporate Bonds

• Unlike regular investment-grade bonds, high-yield bonds come with a shorter maturity period that’s often between 3 and 7 years.

• These bonds offer higher returns in the form of high interest when compared to investment-grade and government bonds. However, this high return also comes with different risks.

• Adding high-yield corporate bonds to your investment portfolio results in instant diversification. This is because their risk and return profiles are different from those of other instruments.

• High-yield corporate bonds also come with a potential for capital appreciation if the issuing company’s financial profile improves. In turn, this improves the bond’s credit rating, resulting in better market prices.

Investing in High-Yield Corporate Bonds

Consider the Risks

Returns and rewards are directly proportional. Therefore, it’s always better to consider the risks before investing in high-yield bonds. Credit, interest rate, and liquidity are common concerns with these instruments. For instance, the value of high-yield bonds can decrease if the interest rates increase. Similarly, there’s a risk of liquidity since these bonds cannot be sold on secondary markets until their term completion.

Understand the Tax Implications

Taxes can eat into the profits earned from investing. Whether it is taxes on interest or the returns earned, consider both before investing in high-yield corporate bonds. According to income tax rules, any interest earned from these bonds is subject to taxation as per your income tax slab. Any capital gains from it are also subject to taxation.

Evaluate Different Platforms

Different platforms can be used to invest in high-yield corporate bonds. The most common options include SEBI-registered depository participants, debt mutual funds, and SEBI-registered brokers. Some specialised bond platforms also allow investment in these bonds with relatively low minimum amounts. Another option for high-net-worth individuals is through private placements. Before investing, take the time needed to evaluate the different options, especially their terms and fees, to make optimal investment decisions.

Carefully Evaluate the High-Yield Bonds

An important aspect of investing in high yield corporate bonds is to choose the right ones. Some important factors to consider are the financials of the issuer, company’s industry outlook, credit rating from well-reputed agencies, bond structure, interest coverage ratio, and the return on maturity. Investing without due diligence is never recommended.

Conclusion

High-yield corporate bonds are unique investments. They have higher interest rates and shorter maturities than investment-grade bonds, but they also carry risks. However, with the right information, calculated investment decisions are easier. This article covered the basics of these bonds, how they work, and how to evaluate them. Before investing, consider your risk tolerance and goals. Consult financial experts to make sure these bonds fit your investment portfolio.

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