By Moneyvesta posted on October 16th, 2023

Do bond funds still make sense

The question of do bond funds still makes sense arises due to the changes in Taxation policy of bond funds.

Starting from April 1, 2023, indexation benefits for long-term capital gains (LTCG) on debt mutual funds have been discontinued. The taxation of debt mutual funds now aligns with an individual's income tax slabs. These changes were enacted through the Government's Finance Bill 2023 during the recent Budget Session. As a result of the removal of indexation benefits, returns on debt mutual funds are now subject to taxation based on an individual's applicable tax slab, similar to the taxation of fixed deposits. Previously, investments in debt MFs held for three or more years were taxed at a LTCG rate of 20% after indexation, or at 10% without indexation.

Although despite the gone benefit of tax the bond funds appear to be a good and better investment option than FDs:

Higher Potential Returns: Bond funds typically offer the potential for higher returns compared to FDs. While FDs offer fixed interest rates, bond funds invest in a diversified portfolio of bonds, which can include government and corporate bonds, offering the potential for capital appreciation and higher yields.

Liquidity: FDs often come with fixed tenures, which means your money is tied up for a specific period. Bond funds, on the other hand, offer greater liquidity. You can buy and sell fund units as per your convenience, making it easier to access your funds when needed.

Interest Rate Sensitivity: Bond funds can adjust to changing interest rates. Fund managers take a call on duration of the portfolios as per the interest rate environment. For example, investing in a bucket of long duration bonds during expectation of lowering interest rates can provide a potential of significant capital appreciation. 

Professional Management: Bond funds are managed by financial experts who make decisions on bond selection and portfolio allocation. This professional management can optimize returns and manage risks effectively.

There has been tremendous growth in returns of the bond funds :

Government securities bond

Corporate bond funds:

Bond funds still remain a popular investment choice for several reasons. 

  • Firstly, they provide a predictable source of income through regular interest payments, making them attractive to income-oriented investors, including retirees. 
  • Secondly, bond funds offer diversification benefits within a portfolio as they often have a low correlation with equities, helping to mitigate risk during stock market downturns. 
  • Additionally, bonds are generally considered less volatile and provide a level of capital preservation, making them suitable for risk-averse investors. 
  • Lastly, bond funds typically offer higher liquidity compared to individual bonds, allowing investors to buy and sell shares as needed, providing flexibility in managing their investments. Specially for people looking out for a safer investment and better returns those traditional methods of FDs and savings.

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