When investing your hard-earned money, you are constantly looking for options that balance safety and attractive returns. One such avenue that has gained popularity among investors is corporate bond funds.
What are corporate bond funds?
Corporate bond funds are a kind of debt mutual fund that focus on investing in bonds issued by companies. These funds collect money from multiple investors and invest in a varied portfolio of corporate bonds.
Professional fund managers, who have extensive experience, manage these funds. They carefully analyze and choose bonds from different sectors and credit ratings. This diversification and professional management make corporate bond funds an attractive option for risk-averse investors.
Features of corporate bond funds:
- Safety: Corporate bond funds invest in company debt instruments, which are considered relatively safer than equities. This is because bondholders have a higher priority claim over assets during liquidation proceedings, reducing the risk of losing your principal amount.
- Steady returns: Corporate bond funds aim to provide stable and predictable returns over a medium to long-term investment horizon. Since these funds primarily invest in fixed-income securities, the returns usually form regular interest income and capital appreciation.
- Diversification: Corporate bond funds offer diversification benefits by investing in a portfolio of corporate bonds across different sectors and credit ratings. This helps mitigate the risk of investing in a single company’s bonds.
- Liquidity: Corporate bond funds provide higher liquidity than directly investing in individual bonds. You can buy or sell units of the fund on any business day, making it easy to access your investment when needed.
What are the expected returns from corporate bond funds?
Returns from corporate bond funds are primarily generated through interest income earned on the underlying bonds. These funds aim to provide higher returns than traditional fixed deposits, making them an attractive investment option for conservative investors.
The returns vary based on the interest rate environment, the credit quality of the underlying bonds, and the fund manager’s skill in selecting the right mix of bonds.
Taxation of corporate bond funds
a. Dividend Distribution Tax (DDT): Any dividends received from corporate bond mutual funds are subject to Dividend Distribution Tax. As per the latest tax regulations, DDT is deducted by the mutual fund at 10%, plus an additional surcharge and cess, before distributing the dividend to investors.
b. Capital Gains Tax: The tax treatment of capital gains from corporate bond funds depends on the holding period. When an investment is held for less than three years, any profits made are considered short-term capital gains and taxed based on the investor’s income tax bracket. However, if the investment is held for three years or more, profits are considered long-term capital gains and taxed at a rate of 20%, with indexation benefits included.
To wrap up
Corporate bond funds provide an excellent avenue for conservative investors seeking steady returns with relatively lower risk. Make informed mutual fund investment decisions, diversify your portfolio, and stay invested for the long term to maximize the benefits of corporate bond funds.