Corporate bond funds invest a minimum 80% of their assets in AA+ corporate bonds. They are highly rated and offer robust safety. Corporate bonds are also safer than gilt funds and long-term debt funds that are highly sensitive to changing interest rates of the economy. Business organisations sell these to cater to short-term expenses like insurance premiums, advertising and working capital needs. This is since the associated costs are usually lower than that of bank loans. The Indian market of these corporate bonds is marked by the dominance of government-owned companies, increasing recourse of the Indian companies to international bond markets and private placement of corporate bonds.
Many corporate bond funds allocate money to government securities. This is mainly because of the zero-credit risk involved. There are no restrictions on the duration of the portfolio scheme as well. Investors usually consider a range of four to seven years for better returns. Corporate bond funds are also known as debt funds. Here’s what you must know.
Benefits of Investing in Corporate Bond Funds
Debt instruments have low-risk sensitivity since it ensures capital protection. This makes it ideal for individuals with low-risk appetites looking for high returns on their investments. But before investing, here are a few advantages to consider.
- Corporate bond funds can be obtained and sold as per your wish. This means high liquidity of the financial resource which lets you convert it into cash as and when required.
- You can expect an average yield of 8-10% from corporate debt instruments while government-held bonds only offer approximately half the amount.
- Equity investments are usually subject to profits and losses. So, they are risky. But a corporate debt fund poses a financial liability to the associated company and have a lower associated risk than shares.
- There are short, long and medium-term bonds in the market. So, these can easily take care of multiple investment patterns and choices. Pick the best corporate bond funds as per your tenure and fund requirements.
The risk on the corporate funds will depend on the decisions of the respective portfolio managers. Companies with relatively lower ratings have a higher risk factor and companies with high credit ratings have low defaulting chances. But make sure your manager is not taking extra miles of risk to boost the corporate bond fund returns. They can invest a portion of the total resource in funds during good market conditions and withdraw when they are able to foresee fluctuations.
Tax Benefits on Corporate Bonds
Staying invested for more than 3 years can accrue long-term capital gains tax. It stands at 20% with indexation. Yet it is a better choice than financial instruments like FDs belonging to the higher tax brackets. These are usually taxed as per the existing slabs.
Corporate bond mutual funds will operate in the share market just like any other standard mutual fund. An increase in its value will automatically increase the NAV of the fund. It is recommended to purchase long-term corporate bonds of 10-15 years to maturity by rotating money out of stocks. It can help save for retirement or higher education.
