When it comes to bonds investment, investors often come across terms like corporate bonds and debentures. While both are debt instruments used by companies to raise funds, they differ in structure, security and risk levels. Understanding these differences can help investors make informed decisions based on their risk appetite and investment goals.
Additionally, many investors also compare debentures and shares, but these two are fundamentally different—shares represent ownership in a company, whereas debentures are a loan given to a company.
In this article, we will explain the difference between corporate bonds and debentures, highlighting key factors that distinguish them.
What Are Corporate Bonds?
A corporate bond is a debt security issued by a company to raise capital. When an investor buys a corporate bond, they are lending money to the company in exchange for regular interest payments (coupons) and the return of principal at maturity.
Secured in most cases
Regular fixed interest payments
Lower risk compared to shares
Issued for medium to long-term funding
Corporate bonds are ideal for investors seeking stable returns with lower risk compared to equity investments.
What Are Debentures?
A debenture is also a type of debt instrument issued by companies to raise capital, but unlike corporate bonds, debentures are usually unsecured, meaning they do not have specific collateral backing. Investors rely on the issuing company’s creditworthiness to ensure repayment.
Can be secured or unsecured
Higher risk if unsecured
May have fixed or floating interest rates
Suitable for companies with strong credit ratings
Debentures are commonly issued by corporations, including financial institutions and NBFCs, to meet working capital or expansion requirements.
Key Differences Between Corporate Bonds and Debentures
| Feature | Corporate Bonds | Debentures |
| Security | Usually secured by company assets | Often unsecured (some are secured) |
| Interest Rate | Fixed, predictable payments | Can be fixed or floating |
| Risk Level | Lower due to collateral backing | Higher if unsecured |
| Issued By | Large corporations, PSUs, NBFCs | Companies across sectors, including NBFCs |
| Maturity Period | Long-term (5-30 years) | Short to medium-term (1-10 years) |
| Convertibility | Non-convertible into shares | Can be convertible or non-convertible |
| Regulatory Body | SEBI (for listed bonds) | SEBI & Companies Act, 2013 |
| Liquidity | Tradable on stock exchanges (NSE, BSE) | May have lower liquidity than bonds |
Key Takeaway: Corporate Bonds are typically safer than Debentures, especially if they are secured. However, debentures may offer higher returns if they come with higher credit risk.
Difference Between Debentures and Shares
Many investors confuse debentures with shares, but they represent entirely different financial instruments.
Shares represent ownership in a company, whereas debentures are a loan given to a company.
Shareholders get dividends, whereas debenture holders get fixed interest.
Shares fluctuate in price based on market demand, whereas debentures provide steady returns.
Shareholders have voting rights, whereas debenture holders do not.
Thus, while shares are equity instruments, debentures and corporate bonds are debt instruments that offer stable income with lower risk than stocks.
Which Is a Better Investment: Corporate Bonds or Debentures?
- If you are a risk-averse investor, Corporate Bonds are a better choice due to their secured nature and lower risk.
- If you are looking for higher returns and can take moderate risk, Debentures (especially unsecured or lower-rated ones) may offer better yields.
Things to Consider Before Investing in Corporate Bonds or Debentures:
- Credit Rating: Choose bonds/debentures rated AAA or AA for lower risk and A or BBB for higher returns.
- Issuer Reputation: Invest in bonds from reputable companies or PSUs with a strong track record.
- Interest Rate Trends: Bonds/debentures lose value when interest rates rise, so time your investment carefully.
- Liquidity Needs: If you need flexibility, go for listed corporate bonds that can be sold on NSE/BSE.
Conclusion
Both corporate bonds and debentures play a crucial role in the bond market, offering opportunities for fixed income investment. While corporate bonds are usually safer and secured, debentures can provide higher returns with additional risk. Investors should carefully assess their risk appetite, return expectations and liquidity needs before choosing between these two instruments.
For stable and predictable returns, corporate bonds are ideal. However, for those willing to take some risk for higher potential gains, debentures can be a good addition to a diversified portfolio.
