Should i invest in debt funds or corporate bonds?

The risk associated with a corporate fund depends on the quality or rating of the debt instruments in which the fund invests.

Corporate Bond Funds

Corporate bond funds invest significantly in debt papers of companies. On a broad level, there are two types of corporate bond funds. First category of corporate bonds stick to high-rated companies, like Public sector undertakings (PSUs) and banks. The second category of corporate bonds, popularly known as credit funds, invest in slightly lower ratings such as ‘AA-' and below. If you stick to credit or corporate bond funds that invest significantly in high quality debt instruments, it’s a safe way to earn regular and higher income than fixed deposits.

Added Benefit

Long-term debt funds can become volatile when interest rates get volatile, so typically these corporate funds minimize their volatility by investing in scrips that mature in 1-4 years. 

What can go wrong?

If you are investing only for a year, credit funds could prove to be dangerous even if a single default by an underlying company happen because that default will set back your fund’s net asset value significantly thereby hurting your prospects at the time of withdrawal.

Attached are some of the corporate bond funds which you can consider.

Debt funds are better than corporate bonds.

Characteristics of debt funds

• Debt fund provide diversity. Investment is done in fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.
• Less risky
• High liquidity
• Earning from debt funds are not taxed. Taxes are to be paid only when an investor sell or withdraw fund units and it also depends on the period of investment.
• Better returns than fixed deposits

Characteristics of corporate bonds

• Debt security issued by corporations and sold to investors
• High liquidity
• Good returns
• Involves credit risk

As you are looking for a low risk investment, you should invest in debt funds. Also debt funds offer a much diversified investment than as compared to corporate bonds.

You can checkout out this link for more information on debt funds- Best Debt Funds 2017

Debt funds are better investment instrument than directly to corporate bonds.

Reason being:

• Debt fund provide diversity by investing most of the money gather from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.
• Debt funds are best option for an investor with low risk appetite.
• Debts fund are highly liquid which can be easily converted in to cash that too within a day time.
• No deduction of taxes or TDS on the earning from debt funds. Taxes to be paid only when an investor sell or withdraw fund units and depending on period of the investment.
• Provide better returns on investment as compared to bank FDs and parking surplus money in savings account.

Some examples of popular debt funds for 2017:

1. ICICI Prudential Gilt Fund - Investment Plan - PF Option – Regular
2. Aditya Birla Sun Life Medium Term Plan – Regular
3. ICICI Prudential MIP 25

 Happy Investing!

A debt fund is a pool of investment that invests mainly in a mix of debt or fixed income securities like treasury bills, corporate bonds, government securities, etc.

A corporate bond is a debt security that is issued by a corporation and sold to investors.

Characteristics of corporate bonds are:

• Strong returns
• High liquidity
• Widespread options
• Involves credit risk

Even though corporate bonds are a good option to invest in separately, when compared to a debt fund are not as good. A debt fund invests in a variety of securities an hence provides better diversification even when a small amount is invested. This diversification in portfolio of the investor reduces risk.