Why Corporate Bond Funds Outshine Company Fixed Deposits: A Comprehensive Analysis
Are you looking for a safer investment option with better returns than a conventional company fixed deposit (FD)? If so, corporate bond funds might be the ideal choice for you. Beyond the obvious benefits, they offer competitive returns, favorable tax treatment, and long-term growth potential. Let’s explore why corporate bond funds are an excellent alternative to company fixed deposits.
1. The Advantage of Corporate Bond Funds Over Fixed Deposits
Fixed deposits have their place in an investment portfolio, but over time, their returns might not keep pace with inflation. This leads to a reduction in the purchasing power of your capital. By contrast, corporate bond funds offer lower risk and higher returns, making them a more attractive option for long-term investors.
Automatically, mutual fund yields, especially Liquid Funds, offer small but consistent returns that slightly exceed those of fixed deposits. Moreover, even after accounting for taxation, the after-tax return on debt mutual funds surpasses the yearly inflation rate. This means your investment keeps up with the rising cost of living.
Tax Implications of Corporate Bond Funds vs. Fixed Deposits
2. Yearly Savings and Deferring Taxes
A key advantage of corporate bond funds is their tax efficiency. Unlike fixed deposits, where you are taxed on accrued interest, even if you don’t withdraw the funds annually, corporate bond funds offer flexibility in tax payment. Capital gains tax is only applicable upon redemption, allowing investors to defer tax liability.
In the case of fixed deposits, taxes are payable every year, regardless of whether the cashed-in interest is withdrawn or not. This can be a significant burden if you are already paying a high amount of tax from other sources. By contrast, with mutual funds, you can choose to hold your shares, thereby avoiding immediate tax obligations.
Tax on Corporate Bond Funds: Short-Term and Long-Term Capital Gains
3. Understanding STCG and LTCG
Corporate bond funds have specific tax rules that vary based on the duration of your investment. Here’s a breakdown of the tax implications:
Debt Mutual Funds: For redemptions within 3 years, Short Term Capital Gain (STCG) tax applies, and the capital gain is taxed as per your income tax slab. For redemptions after 3 years, Long Term Capital Gain (LTCG) tax applies, with a 20% tax rate after indexation to adjust for inflation. Equity Mutual Funds: For redemptions within 1 year, STCG tax of 15% is applicable on the gain at redemption. For redemptions after 1 year, LTCG tax of 10% is applicable on the gain at redemption.The favorable tax treatment of debt mutual funds means that the returns after 3 years can exceed those of fixed deposits, especially when considering the real returns after inflation.
Conclusion
In conclusion, corporate bond funds provide a more favorable risk-return profile compared to fixed deposits. They offer better returns, tax efficiency, and long-term growth potential. Whether you are looking for consistent returns or a hedge against inflation, corporate bond funds are a compelling choice for your investment portfolio. By understanding the tax implications and potential returns, you can make a well-informed decision for your financial future.