To earn better returns and reduce the risk of your investment, you need to decide on your investment goals and the tenure for which you can stay invested. So, if your investment goal is to accumulate a specific amount in the next three years, then investing in corporate bond funds can be helpful. While most people in the country have a preference for fixed deposits and other traditional assets when it comes to short-term investment, as they are risk-free, buying corporate bond funds can help you gain higher returns than these traditional assets without increasing your risk much.
Corporate bond funds are debt mutual funds that invest in corporate bonds. These bonds are debt instruments that corporate houses or public companies issue to raise money for their business expansion or for financing other business requirements. The bondholder is not the stakeholders of the company like equity investors, but they are like lenders to these bond issuers. Thus, an interest which is known as the coupon is paid to the bondholder by the bond issuer for lending the money. At maturity, the bond issuer pays the price of the bond as well. So, the bondholder earns interest as regular income and also gets back the amount they invest in buying the bonds at maturity. These bonds are also traded on stock exchanges and here is where corporate bond funds come in. The corporate bond funds invest in corporate bonds, debentures, debt papers, commercial papers, and also in structured obligations.
- The first type is those which invest in companies that are highly rated, like PSUs and nationalized banks, and top financial organizations.
- Then there is another type which invests in companies that have lower ratings. These bond funds have higher chances of default than the type one funds.
If you are investing for 3 years and you want a safe investment option, corporate bond funds can be the best solution. There are multiple reasons for the same –
* Risk and return: The return offered by corporate bond funds usually varies between 8% and 10% if you take a 3-year annualized return. If the fund you are investing in is high-rated, then the risk quotient is also negligible. Now, if you compare this to regular fixed deposits, where the risk is nil, but returns are also quite lower than the average return offered by corporate bond funds. So, investing in these funds will help you fetch higher returns without taking way too much risk than traditional deposits.
* Interests are reinvested: Corporate bond funds reinvest the interest (coupon) received on the fund, which increases the return from the fund. This is another benefit of investing in corporate bond funds.
* Tax benefit: If you are investing in corporate bond funds for at least 3 years, then you will have to pay 20% long-term capital gain taxes with indexation benefit on the profit you earn from the investment. Thus, if you are investing for 3 years horizon, corporate bond funds fit in the best in terms of tax benefit too. It is much more beneficial for the people who fall into higher tax brackets.
* No lock-in period: There is no lock-in period for these funds, and thus you can redeem them anytime you want. However, if you redeem them before 3 years, you must pay a short-term capital gain tax per your current tax slab.
* Negligible expense ratio: The expense ratio of these funds is very low as well.
So, if you are looking for higher returns than traditional investments offer without taking higher risk, then corporate bonds India can help you achieve your investment goals within three years horizon.
Leave A Reply