Corporate Bond Fund: Fixed deposit schemes (FDs) of banks have traditionally been the most preferred debt investment option for most Indians. But now it is not so. Due to the decrease in interest rates on FD, especially in the last one year, their popularity is decreasing. At such times, corporate bonds can become FD options for those investors who are looking for low-risk investment options.
Check security with credit rating
Corporate bonds are also known as non-convertible debentures. These are debt instruments issued by companies. In fact, companies raise debt by issuing such bonds as an alternative to bank loans. You can check how safe a corporate bond is with the credit rating issued by the rating agencies. Bonds of companies with AAA ratings are considered to be the most secure and have lower risk than AA rated bonds.
Long term debt instrument
Rating credit ricks
AAA: Highest Safety
AA: High Safety
A: Adequate Safety
BBB: Moderate Safety
BB: Moderate Risk
B: High risk
C: Very High Risk
D: Default Risk
Short term debt instrument
Rating credit ricks
A1: Lowest Risk
A2: Low Risk
A3: Moderate Risk
A4: High Risk
D: Default Risk
(Note: CRISIL (CRISIL) in long-term debt instruments from CRISIL AAA to CRISIL C and in short-term instruments from CRISIL A1 to CRISIL A4 use the + or – sign to show a comparative position in any one category. Can do for.)
In fact, corporates compensate for any kind of debt risk on these bonds by giving higher yields than government bonds. Thus low-rate bonds offer higher yields and spreads than government bonds and higher-rated bonds, but have higher credit risk.
Choose the right bond
Choosing the right bond can be challenging for small investors, as they do not have enough skills, knowledge or time to monitor the market. Instead of doing all this, they can choose corporate bond fund.
Yields (%) G-Sec AAA AA+ AA AA- A+
1 3.40 3.91 4.32 4.68 5.42 5.87
3 4.46 4.69 5.21 5.59 6.11 6.56
5 5.04 5.51 5.96 6.25 6.86 7.31
10 5.87 6.59 7.04 7.35 7.61 8.06
(Source: CRISIL figures as of 31 December 2020)
How corporate bonds work
Corporate bond funds are debt mutual fund schemes that invest in corporate bonds or non-convertible debentures. According to the SEBI directive, a corporate bond fund must invest at least 80 per cent of its assets in a top-rated corporate bond. Corporate bond funds invest primarily in the highest quality instruments, so the credit risk of these funds is lower than other debt instruments that may invest in lower-rated instruments.
Why invest only in corporate bonds?
more safety: Corporate bond funds have to invest most of their investment in top-rated debt instruments, so they are more protected than most other fund categories.
Liquidity: The liquidity of these funds is high due to the high emphasis on the top rated instruments, ie it is easy to buy and sell. This helps the fund manager to rebalance his portfolio more effectively.
Stable Performance: Recently, corporate bond funds have consistently given better returns than other debt categories, even amid fluctuations in financial markets.
1 year average return
Corporate Bond Fund: 9.86%
Low Duration Fund: 6.33%
Short Duration Fund: 8.91%
Medium Duration Fund: 7.35%
Dynamic Duration Fund: 9.66%
Banking & PSU Fund: 9.74%
Tax benefit: Investing in a corporate bond fund for more than three years incurs a long term capital gains of 20% with tax indexation. Because of this, corporate bonds are a better option than FDs for investors with higher tax brackets. Because FD is taxed according to their tax bracket.
Corporate bond fund in the portfolio
Depending on the investment requirements, your debt portfolio should have a mix of funds of different duration ranging from a few months to 2-3 years. Your debt portfolio should consist of a mix of high-rated money market instruments, high-rated corporate bonds and government securities (G-Secs). Corporate bond funds are suitable for a period of more than 3 years.
If your investment target is more than three years, then you get the benefit of long term capital gains taxation in debt funds. Corporate bond funds should be part of your core debt fund portfolio. These funds can provide sustainable returns, reduce the risk of decline and provide high post-tax returns if the investment is maintained for a long period. Investors should contact their financial advisors if they find a corporate bond fund suitable for their investment needs.