Corporate bond funds can be a great investment option if you want to invest in a low-risk instrument and earn high returns. Generally, these funds offer better returns when compared to other low-risk investment options, such as fixed deposits.
Also known as a corporate debt fund, this is a debt fund that invests at least 80% of the pooled investments in companies that have a high credit rating. These companies generally have a rating higher than AA-.
Companies with high credit ratings are usually considered more financially reliable since they’re less likely to default on payments.
When it comes to corporate bond funds, you can choose from two different types. These include:
Type One: Invests in high-rated companies, which include Public Sector Undertakings (PSUs) or banks
Type Two: Invests in slightly low-rated companies whose ratings are ‘AA-’
Debt mutual funds trade in the debt markets, where the prices of these securities rise and fall. Through corporate debt mutual funds, higher credit-rated companies issue bonds and raise funds.
These bonds have a certain maturity period, after which you can withdraw the sum. Companies provide interests on the sum you invest through these bond funds.
Here are some of the perks that you can enjoy by investing in corporate bond funds:
Compared to other debt instruments, these funds offer a higher annualised yield, which may range between 8% and 10%.
Since these mutual funds generate short-term returns, they also offer a higher level of liquidity than most debt funds.
Being a debt fund, the risk of investment associated with these funds is quite low when compared to equity-based mutual funds.
You can also enjoy a greater flexibility with these funds in terms of the tenor and company credit ratings.
Here are a few risks associated with investing in a corporate bond fund:
The credit risk or default risk on these funds is generally lower. However, there is no guarantee that companies will not default on repayment. By investing in high-rated companies, you can try to reduce this risk.
Like any other mutual fund scheme, corporate debt MFs are also susceptible to changes in the market. An adverse movement in interest rates can reduce the yield you can expect.
All mutual fund schemes are subject to market risk, there is no guarantee of assured returns or capital safety in this scheme either.
When investing in a corporate bond fund, evaluate the following factors:
It is crucial to consider the credit quality and the ratings of the companies when investing in a fund, as this can affect your returns. As such, determine a company’s creditworthiness before finalising a bond fund.
Investment tenor is another essential factor to consider when investing in these funds. Note that the longer the investment duration, the higher the bond’s price sensitivity toward interest rate changes. As such, these funds are ideal for short investment horizons.
When deciding on which fund to choose, you must also compare the fund’s past performance with other similar funds. However, there is no guarantee that a fund will replicate its past performance in the future. So, be sure to consider your risk appetite.
When choosing the best mutual fund, factor in the expense ratio before making a decision. Since higher expenses can affect your yields, look for a fund with a lower ratio.
The track record and experience of the fund manager is another essential factor to consider. To assess if a fund manager has a successful record, check the past performance of the fund with which they were associated.
Corporate bond mutual funds may be suitable for investors looking to diversify their portfolio and earn a high fixed income. However, when investing in these funds, always consider your objectives, risk tolerance, and investment horizon.
A corporate bond fund is a great investment option as it comes with lower risk, higher liquidity, and better returns compared to other debt schemes. On Bajaj Markets, you can compare different mutual funds and invest in one that best suits your requirements. With a seamless and quick online process, you can begin investing instantly.
Being debt security mutual funds, corporate bond mutual funds ensure capital protection and, hence, are considered safe. This makes them an ideal investment option for risk-averse investors.
The average yields on these funds range between 8% and 10%.
The taxation on corporate bond MFs is applicable as per Section 112 of the Income Tax Act, 1961. If you invest in these funds for less than 3 years, you will have to pay Short-term Capital Gains (STCG). On the other hand, if you invest for more than 3 years, you will have to pay a Long-term Capital Gains (LTCG) tax.
Like all bonds, corporate bond MFs are tradable securities, which means there is no lock-in period. If you wish to sell them before maturity, you can do so in the secondary market.