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Corporate Bond Debt Funds

A corporate bond fund is essentially a mutual fund that invests more than 80% of its total financial resources in corporate bonds. Business organizations sell these to fund their short expenses, such as working capital needs, advertising, insurance premium payments, etc.

Corporate bond funds are increasingly becoming a popular debt instrument for businesses to raise required finances as associated costs are lower than bank loans.

List of Corporate Bond Funds

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What are Corporate Bond Funds?

Corporate bond funds are a sub of the debt funds category that lend at least 80% of their money to corporations with the best credit ratings possible. This rating is only granted to organisations that are financially sound and have a good likelihood of repaying lenders on schedule.

Features of Corporate Bond Mutual Funds

The significant features of these funds are-

  • Higher Returns

These funds ensure significantly higher returns than other debt instruments in the market. Average yields of 8-10% can be expected from corporate debt instruments, while government-held bonds only provide approximately half of it.

  • Liquidity

Since corporate debt funds are generated to satisfy the short-term financing requirements of a business, they, too, are short-term in nature. Also, such mutual funds can be obtained and sold as per the wish of the investor. This provides high liquidity of the financial resource, allowing a person to convert it to cash as and when the need arises.

  • Security

Corporate debt funds have a lower associated risk than shares, as the former poses a financial obligation (liability) to the company. Equity investments, on the other hand, are subject to the profits and losses generated by a company in one financial year and, thus, are relatively riskier.

  • Variety

Top corporate bond funds can be distinguished on the basis of fund tenure, as well as the credit ratings of the companies chosen for the development of the mutual fund portfolio. This distinction caters to different types of investors and their investing patterns in the market. For example, individuals looking for a short term investment opportunity in low-risk bonds can easily choose those who have a shorter maturity tenure. There are short-, medium- and long-term bonds, and also some perpetual bonds in the market.

Types of Corporate Bond Funds

There are broadly two types of corporate bond a mutual fund invests in -

  1. Top-rated companies which have incredibly high CRISIL credit ratings. These are generally top public sector companies and Navratnas.
  2. Companies having a slightly lower credit rating of AA-

How Does Corporate Bond Funds Work?

Corporate bond mutual funds operate in the share market just like any standard mutual fund. An increase in the value of a corporate bond in the portfolio of the mutual fund increases the NAV of the fund, thereby realizing profits. On the other hand, a fall in NAV value has a contrary effect on the aggregate value of the mutual fund.

How Should You Invest in Corporate Bond Mutual Funds?

You can invest in these funds through the help of an intermediary company or asset management companies. 

Alternatively, you can use Groww to invest in mutual funds. Simply, 

- Sign up or register with the Groww application.

- Complete the KYC procedure.

- Pick mutual funds of your choice.

- Deposit the funds for your investment.

Why Should You Invest in Corporate Bond Funds?

The core benefits of investing in corporate bond funds are:

  • Low Risk: Before making any investment, you must assess the risk involved. Corporate bonds in India, in general, are less risky. Inflation has little effect on these bonds.
  • Faster: These bonds are typically used as short-term investments. You will most likely see an immediate return on your investment.
  • Higher Interest: When compared to government bonds, corporate bonds often have a higher interest rate.

Taxation Rules of Corporate Bond Mutual Funds

These mutual funds are taxed differently in India depending on how long they are held: 

If the holding term is less than three years, the tax is calculated using the applicable income tax slab rate.

Long-term capital gains (LTCG) are made over a long period of time. If the holding term exceeds three years, the tax is 20% after the indexation benefit is applied.

FAQ

Q1. What is corporate bond fund meaning?

A corporate bond is a type of financial security that a corporation issues to raise funds for business requirements.

Q2. Who should invest in corporate bonds?

These funds are likely to suit investors who are risk-averse, seek diversification, and those looking for a steady source of income. 

Q3. What is the investment tenure of a corporate bond?

Such mutual funds invest in medium to long-term corporate debentures and bonds. Consider it as a long-term investment instrument.

Q4. Are corporate bonds profitable?

A debt market exists where various debts are traded. Bond prices can grow and fall in this market, just like they do in stock markets. For example, if a mutual fund purchases a bond, its price rises. Then, it can make money in addition to what it would have made from interest income alone. It may, however, go the other way.

Q5. Why Do Companies Issue Corporate Bonds?

Corporate bonds are financial instruments that are issued in the market in order to raise funds from investors. Debt financing, like stock issuance, is common for businesses.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.

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