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Corporate Bond Funds: Invest for regular and better returns than a Fixed Deposit

By Nivesh Gyan   20 April

Category: Better Than FDs

What are Corporate Bond Funds?

Corporate Bond Funds are the ones that invest in fixed income instruments issued by companies including bonds, debentures, commercial papers; each with unique risk profile and maturity.

In simple words, businesses raise money by selling a certain number of shares of their business. A certificate of debt is issued to the investors in exchange for their money they invest in the company.

How do Corporate Bond Funds work?

  • These funds invest in either high-rated companies like the public-sector units or banks or in slightly lower rated companies.
  • Investment in well managed but slightly low-rated fund, mostly come with higher coupon rates to attract the investors. However, the risk quotient is a little higher as the risk of default is greater.
  • These funds at times also take small exposures to government securities mostly when there is dearth of suitable opportunities in the credit space.

Why should one invest in Corporate Bond Funds?

  • Investment in high quality debt instruments ensures regular income that is higher than fixed deposits.
  • Volatility is less as the investment is mostly made in scrips that typically mature in 1-4 years.
  • Liquidity is high as there is no lock-in period.

Corporate Bond Funds and Taxation

Holding Period Income Treatment Tax Implication
Less than 3 years Short-Term Capital Gain Added to income and taxed as per individual’s tax bracket of 10%, 20% or 30%
More than 3 years Long-Term Capital Gain 20% with indexation benefit on cost

Finally, a word of caution!

  • It’s ideal to stay invested in Corporate Bond Funds for at least up to 3 years. If you invest with just a year’s perspective, these could prove unfavourable as a single downgrade of an underlying company could negatively affect your fund’s net asset value.
  • Take note of the exit load of corporate bond funds to get an indication of how long you should stay invested in order to benefit from such funds.