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.
Want to invest in these schemes? Keep reading for in-depth knowledge!
According to SEBI guidelines, these funds need to invest a minimum of 80% of their corpus in the highest-rated corporate bonds. As such, these funds involve relatively less risk than credit risk schemes.
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 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.
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%|
*NAV & Returns data as of 22 December 2021.
There are two types of corporate bonds in India:
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.
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.
You can invest in these funds because of the following benefits:
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.
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.
Since inflation rates do not have much impact on corporate bonds, these schemes carry lower risks.
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 Liquid 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.
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:
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.
Ans: 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.
Ans: 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.
Ans: You can invest in these funds using the following methods:
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.
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.
Ans: 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.
Ans: 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.
Before you go…
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.