Repo-linked savings accounts v/s corporate debt funds: Which is better?
What's the story
REPO-linked savings accounts and corporate debt funds are two popular investment options for those looking to park their money in a safe place. While REPO-linked accounts offer the safety of bank deposits, corporate debt funds promise higher returns with a little more risk. Knowing the difference between the two can help you make the right choice based on your financial goals and risk appetite.
#1
Understanding repo-linked savings accounts
REPO-linked savings accounts are bank accounts where interest is linked to the reverse repo rate set by central banks. This means that the interest on your deposits can change with the reverse repo rate, which is usually lower than fixed deposit rates. These accounts provide liquidity and safety but may not always offer higher returns than traditional savings accounts.
#2
Exploring corporate debt funds
Corporate debt funds invest in fixed-income securities issued by corporations, such as bonds and debentures. These funds aim to provide higher returns than traditional savings accounts by taking on the credit risk of corporate issuers. However, the returns can be volatile, as they depend on market conditions and interest rates. Investors should be aware of the risks associated with corporate credit ratings and economic fluctuations.
#3
Risk vs reward comparison
While REPO-linked savings accounts offer low-risk investment with guaranteed liquidity, corporate debt funds come with higher potential returns but also higher risks. The volatility in bond markets can affect fund performance, while economic downturns may impact corporate credit ratings. Investors should weigh their risk tolerance against potential rewards when choosing between these options.
#4
Liquidity considerations
Liquidity is another important factor to consider when choosing between REPO-linked savings accounts and corporate debt funds. The former allows you to withdraw money anytime without penalty, making it an attractive option for those who need quick access to cash. On the other hand, corporate debt funds may have exit loads or redemption fees if you withdraw before a certain period.
Tip 5
Tax implications
Tax implications differ for both investment options. Interest earned from REPO-linked savings accounts is taxed as per slab rates applicable to the individual taxpayer's income level. Corporate debt fund gains may be subject to capital gains tax depending on how long you hold them before selling or redeeming units from the fund's portfolio holdings.