Corporate Bond Fund

Corporate bond funds are open-ended debt funds that invest at least 80% of their assets in bonds with the highest credit ratings. Corporate bond funds generate returns through the credit opportunities of corporate debt papers. Due to their extended durations, these funds are exposed to interest rate risk. Consequently, they are subject to market volatility. The underlying securities of corporate bond funds can be rated both highly and poorly. Therefore, the creditworthiness of these funds may be poor, and they may have a high credit risk.

What Is a Corporate Bond Mutual Fund?

Corporate bond plans are a form of debt security. These are the sorts of bonds issued by companies. Bonds issued by companies are sometimes known as Nonconvertible Debentures (NCDs). For their operations, development possibilities, and future expansion, companies raise funds. They raise capital via either loans or stocks. A debt issue will not erode any shareholder structure, making it the most preferable option for companies. Companies, both public and private, issue corporate bonds.

Bank loans are not always inexpensive and can become costly. Consequently, companies issue debentures or bonds to raise capital as a cost-effective choice. Occasionally, the company will also pledge its actual assets as collateral. When an investor purchases corporate bonds, the company is borrowing money from them. Therefore, the principal will be repaid upon maturity. Additionally, the company pays interest on the loan; this is referred to as a coupon. Typically, coupon payments occur twice per year.

The category of corporate bond funds is one of the largest within the debt segment (9% of total debt fund assets). Corporate bonds must invest at least 80 percent of their total assets in securities with the highest credit ratings.

In addition, corporate bond funds utilize the credit opportunities presented by corporate debt papers to generate returns. These funds have lengthier maturities, making them susceptible to interest rate fluctuations and market volatility. Additionally, corporate bond funds carry a substantial credit risk. Companies might default on their payments, causing investors to incur a loss. Frequently, the incremental return potential may not justify the increased credit risk and interest rate risk.

Corporate bond funds are taxed similarly to other debt funds. Short-term capital gains (investments redeemed within three years) are subject to taxation at the individual’s marginal income tax rate. Similarly, long-term capital gains (investments sold after three years) are taxed at 20% with indexation benefits.

Types of Corporate Bond Funds

There are two major types of corporate bonds in which mutual funds invest:

1. Companies with the highest ratings and the highest CRISIL credit scores. Generally, these are leading public sector firms and Navratnas.
2. Companies with a little lower credit rating, AA-, than AA.

Who Should Invest in Corporate Bond Funds

Corporate bond mutual funds have a lower risk sensitivity since corporate bonds are capital-protecting debt instruments. It is perfect for risk-averse people seeking good returns on their investments. The duration of the best corporate bond funds is often between one and four years, maintaining the investor’s liquidity.

Features and Benefits of Corporate Bond Funds

1. Returns: Compared to other debt securities on the market, corporate bond funds guarantee significantly better returns. Market yields of 8–10% on average are possible. Corporate debt instruments typically offer yields of 8 to 10%, while government-held bonds only provide about half of that.
2. Security: Compared to shares, corporate debt funds are less risky because bonds place a financial obligation (liability) on the company. Contrarily, equity investments are riskier because they are susceptible to the profits and losses that a company makes in a single financial year.
3. Liquidity: Since corporate debt funds are created to meet a company’s short-term financing needs, they are also short-term in nature. Corporate bond mutual funds can also be purchased and sold at the investor’s discretion. This provides the financial resource with a high level of liquidity, allowing it to be converted to cash on demand.

How do Corporate Bond Funds Make Returns?

• Coupon or Interest payments: Interest is paid by the bond issuer in the form of coupon payments (usually twice a year). This is one method by which corporate bond funds generate returns. The coupon rate is expressed as a fraction of the par value.
• Yield to Maturity: The yield or return of the bond is its annual rate of return. Yield to maturity refers to the overall return of the bond till maturity. Higher yield to maturity (YTM) results in greater returns.

List of Best Corporate Bond Mutual Funds (as per 5-Year Return)

Source: AMFI (data as on 25/08/2022)

How to Invest in Corporate Bond Funds?

You can invest in direct Corporate Bond Funds through Kuvera and avoid paying commissions. It is the best platform to invest in mutual funds as it is 100% free and helps you find the right investment for your life goals.

To invest in Corporate Bond funds via Kuvera, follow the given steps:

Step 1: Sign up at Kuvera.

Step 2: Complete the KYC requirements and link your bank account.

Step 3: Click on MF in the Explore section to choose the corporate bond fund

 for investment. 

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