Corporate Bond: Bonds of companies with AAA rating are considered the most secure and have lower risk than bonds with AA rating.
Fixed deposit schemes (FDs) of banks have traditionally been the most preferred debt investment option for most Indians. But now it is not so. Their popularity has come down in the last one year due to lower interest rates on FD. At such times, corporate bonds can become FD options for those investors who are looking for low-risk investment options.
What is Corporate Bond – Corporate bonds are also known as non-convertible debentures. These are debt instruments issued by companies. In fact, companies raise debt by issuing such bonds as an alternative to bank loans. You can check how safe a corporate bond is with the credit rating issued by the rating agencies. Bonds of companies with AAA ratings are considered to be the most secure and have lower risk than AA rated bonds.
In fact, corporates compensate for any kind of debt risk on these bonds by giving higher yields than government bonds. Thus low-rate bonds offer higher yields and spreads than government bonds and higher-rated bonds, but have higher credit risk.
Vaibhav Shah, head, product, marketing and communications, Mirae Asset Management India, says choosing the right bond can be challenging for small investors, as they do not have enough skills, knowledge or time to monitor the market. Would. Instead of doing all this, they can choose corporate bond fund.
How Corporate Bond Funds Work
Corporate bond funds are debt mutual fund schemes that invest in corporate bonds or non-convertible debentures. According to the SEBI directive, a corporate bond fund must invest at least 80 per cent of its assets in a top-rated corporate bond. Corporate bond funds invest primarily in the highest quality instruments, so the credit risk of these funds is lower than other debt instruments that may invest in lower rated instruments.
Why invest only in corporate bonds?
They have higher security – As we know, corporate bond funds have to invest most of their investment in top-rated debt
instruments, so they are safer than most other fund categories.
High Liquidity – Due to the higher emphasis on top rated instruments, these funds have higher liquidity, ie they are easier to buy and sell, this helps the fund manager to rebalance their portfolio more effectively.
Improved display of corporate bonds between the recent volatility in financial markets volatility fund has consistently better returns than other debt categories.
Investing in a corporate bond fund for more than three years incurs a long term capital gains of 20% with tax indexation. Because of this, corporate bonds are a better option than FDs for investors with higher tax brackets, because FDs are taxed according to their tax bracket.
Corporate bond fund in portfolio allocation
Depending on your investment needs, your debt portfolio should have a mix of funds of varying duration ranging from a few months to 2-3 years. Your debt portfolio should consist of a mix of high-rated money market instruments, high-rated corporate bonds and government securities (G-Secs).
How many years you can invest
Corporate bond funds are suitable for a period of more than 3 years. If your investment target is more than three years, then you get the benefit of long term capital gains taxation in debt funds. Corporate bond funds should be part of your core debt fund portfolio. These funds can provide sustainable returns, reduce the risk of decline and provide high post-tax returns if investment is maintained for a long period. Investors should contact their financial advisors if they find a corporate bond fund suitable for their investment needs.