Last week we had considered the viability of Private Banks as the potential alternative investment option to high-risk defense, power, and infrastructure stocks. Continuing on this theme, this week we look at Corporate and Government Bond.

Unfortunately, this asset class is not a very popular investment option among retail investors. Primarily, because they do not see the differences between a corporate bond and a Bank FD. There are few clear advantages to corporate funds compared to a Bank FD.

1. Better Taxation Policy on income
2. Higher interest rates

Taxation
Return from investment into Mutual funds which are invested in corporate bonds for more than a year are considered a Long-Term Capital Gain (LTCG) with tax rate of 10%, when returns are more than INR 1 Lakh. Less than 1 year, income is taxable as regular income which is usually 30%.

For a Bank FD, the returns LTCG benefits are not applicable.
Consider the following example where post tax the return from corporate bonds is much higher than Bank FD.

Interest Rates Bank FD 1 year & Corporate Bond	Effective Bank interest after Tax (~30%)	Effective Bond interest after LTCG and Fund Fees (~0.3%)
7.0%	4.9%	6.0%

Higher interest rates
Not all corporate bonds are the same. Let’s classify the bonds, look at typical returns and list a few popular bond funds to invest in these bond categories.

1. Government Bonds
2. Low Risk, Corporate Bonds
3. Medium to High-Risk Bonds
4. Other categories such as Money Market and very short duration funds which are not the focus of Retail investors

Type	Typical holdings in Portfolio	3-year return	Example of funds
Government Bonds	Government of India Securities, RBI Treasury Bills and Various State government Bonds	6% - 6.5% per annum	ICICI Prudential Gilt Fund DSP Government Securities SBI Magnum Gilt Fund
Low Risk, Corporate Bonds	Power Finance Corporation, HDFC Bank, Bajaj Housing, NABARD, etc.,	5.5% - 6.5% per annum	ICICI Prudential Banking & PSU Debt HDFC Banking and PSU Debt Fund
Medium to High-Risk Bonds	Tata Motors, Century textiles, Prestige Projects, Nirma Ltd, etc.,	6.5%-10% per annum	Nippon India Credit Risk UTI Credit Risk Fund HDFC Credit Risk Debt

Remember: Before making portfolio adjustments, thoroughly assess your risk tolerance, investment goals and exposure to asset classes such a REITs, Gold, Bods, etc. Consult a financial advisor for personalized advice specific to your unique situation.