Bank’s Fixed Deposit Schemes (FDs) have traditionally been the preferred debt investment option for common investors in India. But, now it is not so. Due to the continuous falling interest rates on FDs, its popularity is decreasing. So investors are looking for some other option with the same protection.
Corporate Bond has emerged as a new option. This can become an easy alternative to FD (Fixed Deposit) for investors who are looking for low-risk investment options. It can be invested even with small amount and it is also easy to invest in it. Know how?
- What is Corporate Bond?
Corporate bonds are also known as non-convertible debentures. These are debt instruments issued by companies. Basically, companies raise debt by issuing such bonds as an alternative to bank loans. If these companies take loan from the bank then they have to pay more interest. Apart from this, their term and conditions are also more strict. Larger companies and having good credit ratings find it more convenient to raise funds through corporate bonds from the market itself.
- What is Credit Rating?
You can invest in corporate bonds of a company, but before that, check its credit rating. Now you would say what is a credit rating? Understand it in simple language that how safe any corporate bond is, you can check it with the credit rating of rating agencies. Bonds of companies rated AAA are considered the safest and carry less risk than bonds with AA ratings. The point to be noted here is that CRISIL is rated ‘CRISIL AAA’ to ‘CRISIL C’ for long term debt instruments and ‘CRISIL A1’ to ‘CRISIL A4’ for short term instruments. ‘ or ‘-‘ sign can be used to show the comparative position in one of the ranges.
- How to choose the right bond?
Choosing the right bond can be challenging for small investors, as they may not have enough skill, knowledge or time to monitor the market. However knowing about it is not rocket science. By doing a little study, useful information can be taken about it. Those who do not even have this, they can opt for corporate bond funds instead of doing all this.
- How do corporate bond funds work?
Corporate bond funds are debt mutual fund schemes that invest in corporate bonds or non-convertible debentures. As per the SEBI directive, a corporate bond fund has to invest at least 80 per cent of its assets in a highly rated corporate bond. Since corporate bond funds invest primarily in top quality instruments, the credit risk of these funds is lower than other debt instruments that may invest in lower rated instruments.
- Why invest in corporate bonds only?
The question that arises here is why invest in corporate bonds only? In response to this, it can be said that they have more security. As we know, corporate bond funds tend to invest the bulk of their investments in top rated debt instruments, hence they are safer than most other fund categories. These funds have higher liquidity, which means they are easier to trade, due to the higher emphasis on top rated instruments, which helps the fund manager to rebalance his portfolio more effectively. Also its performance has been durable.
- Tax benefits also available?
Yes, tax benefits are also available in a corporate bond fund. Investing in a corporate bond fund for more than three years attracts 20 per cent long term capital gains tax with indexation. Because of this, corporate bonds prove to be a better option than FDs for investors in higher tax brackets. This is because FDs are taxed according to their tax bracket.
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NOTE: The information is being presented without consideration of any specific investor’s investment objectives, risk tolerance or financial circumstances and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including potential loss of principal.