Corporate Vs Government Bonds: Which One To Choose For Better Investment?

Bonds are one of the staple components of an investment portfolio. They balance safety with returns. One can choose between corporate and government bonds for investment purpose.

In fact, both are fixed-income securities, but, however, they serve different ends for different investors based on risk, return, or purpose. 

What Are Government Bonds?

Government bonds, also known as sovereign bonds, are issued by the central or state governments to raise funds for public projects or expenses. In India, these include instruments like G-secs (government securities), treasury bills (T-Bills), and state development loans (SDLs).

Key Features Of Government Bonds

Safety: These bonds are one of the safest investment options as they are backed by the government. The risk of default is minimal.

Returns: The returns are relatively lower than that on corporate bonds as the focus is on safety rather than high yields.

Tenure: Government bonds can be short-term, like T-Bills (91 days), or long-term, such as up to 40 years for some G-secs.

Tax Benefits: Certain government bonds are also tax-free bonds, and investors are exempted from paying income tax on interest income under Section 10(15) of the Income-tax Act, 1961.

For instance, if you invest Rs 1 lakh for 10 years in a G-Sec with an annual interest of 7 per cent  and you will get Rs 7,000 every year as a risk-free return.

What Are Corporate Bonds?

Corporate bonds are issued to raise funds for conducting business or undertaking company expansion or to refinance old debt of private or public companies. This is the major external source of financing for companies.

Main Features of Corporate Bonds

Risk And Ratings: Corporate bonds are riskier than government bonds. They are only as safe as the creditworthiness of the company issuing them. These bonds are rated by agencies such as Credit Rating Information Services of India Limited (Crisil) or Investment Information and Credit Rating Agency (Icra). The safer the bonds are, the higher the rating (AAA).

Returns: They typically provide higher yields than government bonds to compensate for the added risk.

Maturity: Corporate bonds also have varied maturities, but most are of the mid-term maturity with durations between 1 year and 10 years.

Taxation: The interest earned is taxable and does not attract any special tax exemption as in the case of a few government bonds.

For instance, an investment of Rs 1 lakh in a 5-year AAA-rated corporate bond earning an annual interest of 8.5 per cent will yield a return of Rs 8,500 a year, but at slightly higher risk.

Which One Should You Select?

For Safety: If your aim is safety of capital, then government bonds are apt because they carry no risk. They are highly favoured by retired and conservative investors.

For Higher Returns: If you want to take a bit of risk with the expectation of achieving higher returns, then corporate bonds are good for you. They attract investors who seek to beat inflation.

For Diversification: A mix of both bonds can provide a balance of safety and growth, allowing you to enjoy the best of both worlds.

The choice between a corporate bond and a government bond depends on your financial goals, risk tolerance, and the investment horizon. Government bonds ensure security, but corporate bonds come with attractive returns. Evaluate your needs carefully and consider seeking advice from a financial planner to select the right type of bond for your portfolio.