Any company has two ways to raise money for their day to day operations and future expansions – debt and equity investment.
Equity investment means diluting the present holding of the company by expanding its shareholder’s base. Debt, on the other hand is considered to be a safer option as it doesn’t affect the shareholders directly.
Due to this reason most companies prefer debt. Bank loans are nowadays quite expensive and therefore, companies are shifting to other economical alternatives like bonds or debentures to raise funds.
In this article
What is a Corporate Bond Fund?
Corporate bonds are essentially a certificate of debt issued by big companies.
When you buy any on those bonds, you are actually lending money to the company. The company will repay the principal amount to you, after the maturity period that you agreed on.
In the meantime, you will receive interest (fixed income) to your account, which is known as a coupon. Coupon payments are generally made twice in a year in India.
Corporate bond funds are open-ended debt mutual fund schemes which invest at least 80% of its total assets in these high rated corporate bonds. By looking at the basic nature and feature of the corporate bonds, you can get an idea that it is for investors who want fixed and higher returns from safer avenues.
Why Choose Corporate Bond Funds?
If you want to invest in a safer debt option then corporate debt fund is a good option. Some market knowledge is always required to choose among the available securities.
So, you should try to understand the basic risks and return of the market. Corporate Bond Funds invest in corporate debenture and bonds of medium to long term tenure.
Remember that a large number of defaults within a fund’s portfolio can lead to a serious drag in returns. So, you should consider the past return records before choosing the fund to invest in.
In case of corporate bond funds, it is better to stick to the offerings of large Asset Management Companies, as because the reliability and confidence in the fund manager and AMC’s will help you believe that the investments are in good hand and thus reduce your risk.
Otherwise, new investors would be better off sticking to high-rated short term debt funds with lower credit risk.
Thus, corporate bond funds are good choice for investors with low-risk appetite.
Investors and Corporate Bond Funds
There is always a risk of default in debt securities. This default risk is higher for low rated securities, and goes up exponentially with increasing maturities.
So, if the fund manager invests only in high rated companies, then the risk of default is minimal with an average return of 8-10%.
Long term debt funds tend to become riskier due to the interest rate fluctuations. Corporate bond funds, on the other hand, invest in scrips to reduce this volatility.
Even a well-managed fund, which invests in slightly low rated bonds can be rewarding. These low rated companies tend to keep high interest rates to attract investors.
But, the call of the fund manager might even be wrong if the company defaults in the repayments. So, it is very important for the fund manager to keep tracking the investment portfolio and manage it properly on a timely basis.
What Is the Present Scenario?
Corporate bond spread is the difference between the yields/returns of the corporate bonds with respect to government bonds of the same tenure.
According to the data compiled by Bloomberg, the average corporate bond spread for a 10 year paper rated AAA has been increased to 140 basis points, the highest in the past six years.
Corporate bond yields across all maturities and rating categories between April and January in the financial year 2019, averaged to 8.98%, 70 basis points higher as compared to financial year 2018.
As per the CARE Ratings report, the returns on corporate bond is the highest in the past four years.
Dealers do expect a drop in the returns of corporate bonds, firstly due to rate cuts by the Reserve Bank of India by 25 basis points to 6.25% in February 2019 and secondly due to falling inflation numbers.
As the returns are high, investors tend to buy good quality bonds and hold them leading to higher issuances.
3 Best Corporate Bond Funds You Can Consider Investing In
The fund is an established corporate bond fund and has outperformed both its benchmark and category average.
It has a strong portfolio of securities. Around 69% of its assets are invested in AAA rated instruments and another 11% in AA+ rated securities.
The issuers of top 3 holdings of the scheme are Government (12.46%), Power Finance Corporation Limited (10.06%), and Rural Electrification Corporation Limited (8.15%).
The Aditya Birla Sun Life Corporate Bond fund is a good choice in the category considering its impressive performance and reliable portfolio.
|Launch Date||03 March 1997|
|NAV (12 March 2019)||Rs. 71.0751|
|AUM (Fund Size in Crores)||Rs. 15,234 on 31 January 2019|
|Yield to Maturity||8.45%|
The fund has become the second largest corporate bond fund in a period of 8 years.
It has performed very well as compared to its benchmark. The scheme has outperformed its category average of 7.91% during the 5 year period, by generating a return of 8.58%.
The HDFC Corporate Bond Fund’s portfolio consists of around 90% investments in AAA rated instruments and around 6% of its assets in sovereign securities.
The issuers of top holdings in this scheme are Power Finance Corporation (8.86%), Housing Development Finance Corporation (8.45%), and Bajaj Finance (6.63%).
Given the scheme’s extraordinary performance which is backed by investments in highly secure instruments, it could be beneficial to your portfolio
|Launch Date||29 June 2010|
|NAV (12 March 2019)||Rs. 20.6179|
|AUM (Fund Size in Crores)||Rs. 11,520 on 31 January 2019|
|Risk Moderately||Moderately Low|
|Yield to Maturity||8.29%|
Around 70% of the assets of this scheme is invested in AAA rated securities, around 14% in AA+ rated securities and 6% in AA/AA- rated instruments.
Power Finance Corporation (7.96%), Small Industries Dev Bank of India (6.63%), and Rural Electrification Corporation Limited (6.45%) are the issuers of top 3 holdings of Reliance Prime Debt fund.
This scheme is a good choice for the corporate bond fund category due to its good returns and sound portfolio.
|Launch Date||4 September 2000|
|NAV (12 March 2019)||Rs. 38.9005|
|AUM (Fund Size in Crores)||Rs. 3390 on 31 January 2019|
|Yield to Maturity||9.18%|
Disclaimer: The views expressed in this post are that of the author and not those of Groww