What are Corporate Bond Funds: Types, Benefits, Risks and Returns
Corporate bond funds are open-ended mutual funds that allocate the majority of their corpus in corporate bonds. Companies sell these debt instruments to cover various costs such as insurance premium payments, advertising and working capital requirements. Mutual funds investing in these bonds are known to offer favourable returns at low risk. This article lists out the best corporate bond funds, their types, benefits, how to invest, risks and more.
What are Corporate Bond Funds?
Corporate bond funds invest a minimum of 80% of their corpus in the highest-rated corporate bonds. A corporate bond is a debt instrument that a business organisation sells to raise money for its operations. It involves repayment of the principal amount along with interest earned. In simple words, if an investor purchases this bond, he is loaning the sum to the organisation for its operations. These funds are relatively less riskier than credit risk schemes.
These bonds are legal agreements that bind the organisation to repay the money to the investor with interest at regular intervals. Corporate bonds usually provide a higher rate of interest than government bonds.
How do Corporate Bond Funds Work?
Corporate debt funds are a type of mutual fund. These open ended debt funds invest 80% of the assets in the highest rated corporate funds. They have high market volatility due to the long duration and are subject to risk of interest rates. Corporate bond funds utilise the credit opportunities of the debt papers to get returns. Credit quality of these funds can be considerably low as they have both high and low rated securities.
What are the Best Corporate Bond Funds in India?
Following is a list of some of the best corporate bond fund schemes in India:
| Funds | Returns in 5 Years |
| Franklin India Corporate Debt Fund – Plan A – Direct | 8.06% |
| HDFC Corporate Bond Fund – Direct Plan – Growth | 7.96% |
| Aditya Birla Sun Life Corporate Bond Fund – Direct Plan | 7.92% |
| Kotak Corporate Bond Fund – Direct Plan – Growth | 7.79% |
| ICICI Prudential Corporate Bond Fund – Direct Plan | 7.74% |
| L & T Triple Ace Bond Fund – Direct Plan – Growth | 7.59% |
| Sundaram Corporate Bond Fund – Direct Plan | 7.55% |
| IDFC Corporate Bond Fund – Direct Plan | 7.54% |
| Nippon India Corporate Bond Fund – Direct Plan | 7.53% |
| PGIM India Premier Bond Fund – Direct Plan | 7.26% |
Types of Corporate Bonds
There are two types of corporate bonds in India:
1. Convertible Bonds
An investor can convert these bonds into stocks at his disposal. In case he feels that stocks are offering better returns than bonds, he can turn them into shares.
2. Non-convertible Bonds
These are plain bonds issued by highly rated companies with relatively higher interest rates compared to convertible debentures. An investor cannot convert these bonds into shares or equities.
Benefits of Investing in Corporate Bond Funds
You can invest in these funds because of the following benefits:
1. Higher Interest Rates
Interest rates of corporate bonds are usually higher relative to government bonds. If an investor is looking for higher returns, he can invest in these funds.
2. Faster Rewards
These bonds generally involve short-term investments. Investors are likely to gain from these investments within a short period. Corporate bond mutual funds provide high liquidity, i.e., an individual can purchase and sell the fund units whenever required.
3. Lower Risk
Since inflation rates do not have much impact on corporate bonds, these schemes carry lower risks.
Bond Fund Returns and Risks
Corporate bond funds come under debt mutual funds and work with both high and low securities. If the fund manager invests in a high rated company then the investors will get good returns on their investment expectedly. There is almost no to minimal risk in such an investment. However, if the fund manager decides to invest in a lower-rated fund then there are two possibilities. Either the fund can be well managed and gives good returns or the fund manager’s judgement was wrong about the fund when it can significantly affect the credit quality of the company. It has a higher risk but also higher chances of return.
Why Should You Invest in Corporate Bond Funds?
Corporate debt funds are one of the most preferable options among mutual funds. Following are the top reasons you should consider before you zero in on investing in corporate bond funds:
1. Security
The duration of a corporate debt fund can be flexible. However, for conservative investors, this fund is the most preferable because of its guaranteed security. The company will have to pay back its investors. The profits and losses in one financial year are subject to market risk or volatility. Hence it is a good option for investors seeking long or mid-term profits.
2. Liquidity
Corporate bond funds come with flexibility in maturity periods. Long, short or mid-term maturity tenures make it easier for investors to choose the option most suitable for their needs. Corporate bonds are also easy to trade in the market due to their demand and the vastness of the stock market.
3. Returns
Corporate debt funds provide higher returns. The companies with higher ratings will have lower to minimal risk and moderate returns while some lower-rated but well-managed funds will have higher risk but will also give higher returns.
4. Tax Benefits
It is advisable that if you are going to invest in a corporate debt fund you should do so for a longer duration. Investing for a minimum of three years will have tax benefits. You can avail of this benefit while filing for tax returns where you will get a 20% indexation benefit (The purchase price is recalculated after adjusting for inflation. Which reduces capital gains and lowers ta liability).
How to Invest in Corporate Bond Funds?
You can invest in a corporate debt fund in direct or regular method:
Under direct methods you have two options:
- AMC (Asset Management Company) or fund house
- Investment platforms
You can invest through an AMC in the following steps:
- Step 1: Visit the website of the AMC
- Step 2: Log in to your account or register
- Step 3: Compare different types of funds and see if a corporate debt fund is the most suitable option for you
- Step 4: Choose your option and start investing
You can follow similar steps to invest through an online investment platform.
If you want to invest offline, you have to visit the nearest branch of the AMC or fund house and they will assist you in the process.
If you wish to invest in a regular method, you have to do so through a third party or intermediary. The expense ratio is usually higher for this as the AMC has to pay a commission or brokerage fee to the intermediary.
How are the Gains from Corporate Bond Funds Taxed?
If the scheme units are held for up to 36 months, an investor will be having short-term capital gains (STCG). On the other hand, if the holding period of the units is less than 36 months, the investor will receive long-term capital gains (LTCG). The taxes on these gains are as follows:
- The tax on STCG is based on the investor’s income tax slab.
- The tax rate is 20% on LTCG after adjusting for indexation.
Who Can Invest in Corporate Bond Funds?
A corporate bond fund is a debt fund ensuring capital protection. It is suitable for risk-averse individuals who wish to preserve liquidity. The investment patterns of the portfolio managers impact the risks related to corporate bonds. Bonds of organisations with low credit ratings involve higher risk than those with higher ratings.
If an individual wants to choose some other low-risk mutual fund schemes, he can invest in Navi Mutual Fund. With a maturity period of up to 91 days, this debt fund is one of the safest investments while offering twice the returns of a savings account. A person can start investing via platforms such as Zerodha, Kuvera, INDmoney and Groww.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Factors to Consider before Investing in Corporate Bond Funds
If you decide to invest in a corporate bond fund, consider the following:
- Though corporate debt funds are flexible by nature, you should consider investing for a long or medium tenure to get good returns.
- While investing in corporate debt funds, it is better to invest in the top five funds as offered by AMCs. Funds with higher ratings will have moderate returns with low risk. For newbies, it is better to stick to high rated and short term funds with low credit risk.
- If you are not a seasoned investor, it may not be smart to invest in corporate bond funds yet.
Final Word
Individuals looking for low-risk and short-term investment avenues can select corporate bond funds. These schemes offer passive income and are ideal for portfolio diversification. Before investing in these funds, analyse the risk-reward ratio carefully.
FAQs
A credit rating is the opinion of a specific credit agency concerning the willingness and ability of an entity (individual, business or government) to fulfil its monetary obligations within the due date. The rating also denotes a company’s chance of defaulting.
Indexation is the process through which you can recalculate the purchase price of an asset to adjust it for inflation. Individuals are eligible for indexation benefits in case of long term capital gains from investments in debt funds. This benefit reduces investors’ tax liability.
You can invest in these funds using the following methods:
1. Lump-sum: This involves making a one-time investment in a mutual fund. A person having high-risk tolerance and substantial disposable money can choose to invest through this method.
2. SIP: Individuals can invest in mutual funds at regular intervals (monthly, half-yearly, yearly or quarterly) through a systematic investment plan (SIP). This method lets you benefit from rupee cost averaging, which makes sure you get more shares when the prices are low and vice versa.
Par value denotes the minimum amount at which a company issues the corporate bonds to the investors. It is also known as a nominal or face value.
Example: An organisation issues corporate bonds with a par value of Rs. 90 per bond, and an investor holds 1000 fund units. The business organisation has to repay Rs. 90,000 to the investor on maturity.
A bond issuing company pays the interest rate, known as coupon rate, on the bond’s face value.
Example: If an investor has a ten year- Rs. 3,000 corporate bond with 10% as the coupon rate, he will get Rs. 300 every year for ten years. The market’s bond price will not have an impact on the coupon rate.
The ideal period to stay invested in corporate bond funds is usually between 1 and 4 years.
Corporate bond funds have 80% of their corpus invested in highest rated companies. It is considerably a low-risk investment as it ensures capital protection. So it is comparably a safer option for long term investment with higher returns.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
