Bond investor sentiments have been hurt ever since the non-payment of dues by IL&FS that has especially affected mutual funds. Investors are now skeptical about the performance of their investment as well as its safety. Betting on credit risk schemes which are focused on high yields with its investments in bonds with low ratings has only proven unfruitful after the recent losses from NBFC (non-banking finance company) bets. IL&FS also showed us that despite high ratings, unsecured bonds are very risky.
Firstly, as an investor, you need to understand if your reason for investment. Bond funds should be your preferred option over equity fund when your intention is to preserve wealth rather than generate it. If you are not happy with the interest offered by banks on fixed deposits, (which are also safe options to lock away accumulated fund) and not comfortable with betting your money on high-risk-high-returns bonds, here are 5 reasons to consider PSU and banking bond funds for your investment needs.
1. Low risk
PSU and banking bonds are mutual fund schemes that invest in bonds issued by public sector undertakings which including government-run banks.
There are some quality banks in the country making significant profits, and the mutual fund managers carefully pick from these bonds issued by them as well as PSUs.
These bonds are backed by government guarantee and therefore hold low credit risk. These are ideal for investors with a low-risk appetite.
2. Ideal for higher income tax brackets
If you are in the higher income tax bracket with significant investment in bond funds, you can benefit from the taxation when invested on a long-term basis. While short-term investments that are less than 3 years old are taxed as short-term capital gains (applicable as per tax bracket), gains from mutual fund investment beyond 3 years are taxed at 20 percent with the benefit of indexation, irrespective of your income tax bracket).
3. Long term locking
These instruments have to considered as a way to lock away a recent capital gain which you do not need for the next 5 to 10 years. Instead of mutual funds, you can also choose to directly lock them in tax-free government bonds. The idea behind banking and PSU bonds is that it has to be looked at with long-term investment perspective.
4. Better yield than credit risk schemes
Credit risk schemes are chosen for their higher yields. However, a comparison between HDFC Banking & PSU bond funds and HDFC credit risk bonds by moneycontrol.com showed that the post expense net yield in a regular plan of the former is greater than the latter.
While this is just one example, it is good to compare your expected yield before you invest in a mutual fund so as to ascertain if the credit risk bonds are worth taking the additional risk.
5. Not complex
It is always advised to only bet on financial instruments that you could bet on. Even if you hire an expert like a fund manager in the case of mutual funds, you ultimately hold the responsibility since it is your money.
In that case, bonds are ideal for those who do not have a good understanding of when to take a call on interest movements and cannot find time to track investments. Banking and PSU bonds are simpler to understand than credit risk bond funds as well.
In conclusion, if you are looking add value to your investment profile and good returns, equity funds should be preferred over credit risk. Furthermore, if you wish to avoid risks, banking and PSU bonds should serve well.