I want to invest a lump-sum amount for a period of 12-18 months, taking some amount of risk. I want to choose between a corporate fixed deposit and a corporate bond fund. Which one is a better option?
- Rajiv Kamat
Corporate bond funds will be a better choice even if you get slightly lower returns. This is because these funds will spread your risk. If you put your money in a corporate fixed deposit and the money gets stuck, then all your money will be stuck. But if you invest in a bond fund and if it faces a calamity and loses money due to one or two bonds going wrong, then only a small part of your money will be stuck. So, looking at the downside, I think diversification is better in corporate bond funds. Of course, investing in them will translate into some compromise on returns, as these funds have some allocation to AAA rated bonds, AA rated bonds and government securities to ensure continuous liquidity. But I would say that a fixed-income investor with an investment horizon of more than a year should simply go for a corporate bond fund over corporate FDs to diversify and reduce the risk.