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Corporate Bond Funds – Working, Benefits, Risks, Taxation & Best corporate bond funds

  • Rudri Rawell
  • Jan 12 2022
  • 7 minutes
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Corporate bond funds are open-ended debt mutual funds that invest minimum 80% of their assets in the highest rated corporate bonds. Corporate bond funds aim to utilise credit opportunities offered by the corporate debt papers for earning returns. Here, we will talk about corporate bond funds and also share some of the top performing corporate bond funds for investors to consider making an investment.

What are corporate bond funds?

Organisations that need capital can raise funds through debt and equity instruments. 

Debt is usually a safer choice, as it doesn’t directly affect the shareholders of the company and the promoter stake in the company is not diluted. Bonds or debentures can also be economical alternatives for raising funds. Therefore, most companies go for debt issues to raise capital. But like any other loan, interest has to be paid and the principal has to be repaid at the end of the tenure of the debt raised. 

Debt mutual funds try to make the most of credit opportunities offered by corporate bond securities. A corporate bond fund invests over 80% of the total funds in corporate bonds. Corporate bond funds are gaining popularity among the debt instrument market as investors gain from a combination of corporate exposure and security offered by debt investments.

Who should invest in corporate bonds?

Corporate bond mutual funds have comparatively lower risk sensitivity since these invest in debt instruments by aiming for capital protection. Risk-averse investors who want reasonable returns and sufficient liquidity on their investments can go for corporate bond funds. 

As compared to other debt instruments, corporate bonds offer higher interest rates since they involve higher credit risk. The risk level also depends on investment patterns adopted by a mutual fund’s portfolio manager. Companies that have high credit ratings may have lower chances of defaulting, thereby reducing the risk element of the portfolio.

What are the benefits of investing in corporate bond funds?

Some of the major benefits of investing in corporate bond funds are –

1. Better returns

Corporate bond funds can generate better returns as compared to other debt instruments. The returns of these funds often range around 8-10% whereas government-issued bonds can provide only half of these returns. But remember, government issued bonds are safer as they have the guarantee of the Govt. 

2. Higher liquidity

Corporate debt funds mainly cater to short-term financing needs of a business. Therefore, these are often short term in nature. These can also be freely bought and sold as per personal investment goals. Therefore, investors can benefit through higher liquidity, as they can convert the mutual fund unit in dynamic bond funds into cash when a need arises.

3. Lower risk

Corporate debt funds are less risky as compared to stocks since debt is a financial obligation (liability) on the company. Equity is subject to the profits and losses of a company and is therefore relatively riskier.

4. Different varieties

Corporate bond funds are often differentiated on the basis of fund tenure and credit ratings of the companies that form part of the portfolio. This differentiation allows investors with different investing patterns to invest in corporate bond funds. For instance, those who want to invest for the short-term combined with low-risk investment options can invest in corporate bonds that have a shorter maturity period.

Higher returns are also possible through investments in low rated companies. For this, the fund has to be managed by an expert portfolio manager who makes strategic investment decisions. Organisations that have a lower credit rating may offer higher coupon value to attract investments from individual investors and mutual funds. Portfolio managers may invest a sizable portion of the total pool in such funds during market conditions while liquidating the funds in case of market turbulence. 

Taxation on Corporate Bond Funds

If an investor remains invested in a corporate bond fund for less than three years, short-term capital gains tax (STCG) is applicable as per the individual’s tax slab. Section 112 of the Indian Income Tax states that 20% tax is applicable with indexation benefit on long-term capital gains from these fund investments if the units are retained for at least 3 years.

Important points to note before investing in corporate bond funds

Here are some aspects that investors must consider before investing in corporate bond funds:

  1. Corporate bond funds must ideally be considered for long-term investment since these invest in corporate debentures and bonds that have medium to long-term tenures.
  2. It is important for investors to have some amount of market knowledge while investing in corporate bond funds. This will help in understanding the potential risks and market sentiments.
  3. In case of a large number of defaults, there could be a severe impact on the portfolio returns. 
  4. It makes sense to prefer investing through large AMCs. 
  5. New investors must try to invest in high-rated short-term debt funds that have lower credit risk.

Best Corporate bond funds  to invest in 

Here’s a look at some of the recommended corporate bond funds:

ICICI Prudential Corporate Bond Fund
The scheme aims to generate income through investments in corporate bonds that are rated AA+ and above. It seeks to maintain an optimum balance of risk, returns and liquidity. It is best suited for investors looking to park short-term savings and generate regular income. 

Inception DateJanuary 02, 2013
Benchmark NameCRISIL AAA Short-Term Bond Index
Fund ManagerChandni Gupta, Rahul Goswami, Anuj Tagra.
Expense Ratio0.27%

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
4.54%7.59%8.46%7.79%8.62%

HDFC Corporate Bond
The open-ended scheme aims to generate income and capital appreciation through investments in AA+ and above rated corporate bonds. It is rated as moderate risk. 

Inception DateJanuary 01, 2013
Benchmark NameNIFTY Corporate Bond Total Return Index
Fund ManagerAnupam Joshi
Expense Ratio0.30%

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
4.39%8.06%8.86%8.01%8.64%

IDFC Corporate Bond Fund
The fund’s objective is to deliver returns through investments primarily in the corporate bond segment. It invests in high quality corporate bonds. 

Inception DateJan12, 2016
Benchmark NameNIFTY AAA Short Duration Bond IndexCRISIL 10 Year Gilt Index
Fund ManagerSuyash Choudhary
Expense Ratio0.27%

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
4.02%7.85%8.18%7.59%8.04%

Aditya Birla Sun Life Corporate Bond Fund
The fund aims to generate positive returns combined with high liquidity by actively investing in High Quality Debt and Money Market Instruments.

Inception DateJan 01, 2013
Benchmark NameNIFTY Corporate Bond Total Return Index
Fund ManagerKaustubh Gupta
Expense Ratio0.30%

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
4.20%8.00%8.60%7.95%8.70%

Conclusion

Every mutual fund investment comes with a certain degree of risk. Therefore, investors must carefully consider historical returns, market sentiments, fund manager expertise and also the expense ratio of the fund that they want to invest in.

FAQs

  1. Who should invest in a corporate bond fund?
    Investors looking for low risk and low returns can consider investing in corporate bond funds. It is ideal for investors who have an investment horizon of 3-5 years. These are best suited for those who want fixed and regular income through their investment.
  1. How long should I remain invested in Corporate Bond Mutual Funds?
    Corporate Bond Funds invest in medium duration debt products. Therefore, an investor should ideally stay invested in these funds for at least 2-3 years.
  1. What does a Corporate Bond Mutual Fund portfolio comprise?
    Corporate Bond Funds are required to invest at least 80% of their pool in companies with the highest credit rating. There is no defined or mandated lending duration. However, most funds generally lend for a 2-3 year time frame.
  1. Are Corporate Bond Mutual Funds high risk?
    Corporate Bond Funds are required to lend primarily to good quality borrowers. Compared to government-debt oriented funds, these funds may carry a high risk. These funds can also be affected by interest rate movement in the economy. 
  1. How to invest in corporate bond funds?
    You can easily invest in a top rated corporate bond fund by downloading the Finity app on your smartphone. This app allows a seamless investment process that can be carried out at your fingertips.
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