Corporate Bond: Fixed deposits (FDs) have long been considered a better investment option as they provide returns at fixed rates against the volatility of the market. However, for some time now, FD rates have come down so much that investing in it is no longer attractive. Apart from this, the tax liability on the return it generates also reduces its attractiveness. In such a situation, for those who cannot take high risk, corporate bonds can prove to be a better option as an alternative to FD. It is difficult for small investors to choose the right bonds as they do not have enough knowledge and time to invest in them through corporate bond funds.
Corporate bond funds are mutual funds that invest more than 80 per cent of their capital in corporate bonds. Companies issue corporate bonds for short term expenses such as working capital, advertising and insurance premium payments. Their cost is less as compared to bank loans, due to which companies are now emphasizing more on adopting it to raise capital. This means that corporate bonds are better not only for companies but also for small investors as corporate bonds can give better returns than FDs on funds and also provide higher tax benefits.
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That’s why Corporate Bond Fund is better than FD
Corporate bonds are a better investment option than bank FDs. If you hold your investment in corporate bonds for at least 3 years, then it will attract long term capital gains tax at the rate of 20 per cent. On the contrary, tax has to be paid on FD returns according to the income tax slab. Apart from this, the benefit of indexation on returns is also available in corporate bond funds. Investing in corporate bonds is a better option for low-medium, medium and medium risk profiles.
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Why Investing in Corporate Bond Funds is Better
Credit rating agencies evaluate the safety of corporate bonds. These can be assessed by the credit ratings issued by these agencies. Companies whose bonds are rated AAA are considered the safest. The maximum corpus of bond funds is invested in high rated companies, due to which they are better than other debt funds and have less credit risk. This bond is best suited for investors looking to invest in a high-yield option with less risk than equities. It is a low-risk investment option in which one can invest to build large capital in the long term.