What are Corporate Bond Debt Funds? - Types & Features

Mutual fund investment is one of the best ways to earn better returns. While most prefer to invest in highly risky financial instruments such as equities, there are some i nvestors who opt for debt fund as it is less risky and promises steady returns. As an investor, if you are looking at low-risk investment portfolio, you can invest your money ina Corporate Bond Debt Fund.Also known as Non-Convertible Debentures (NCDs), corporate bonds are issued by organizations who want to raise capital for business purposes. Primarily, the reasons for issuing funds can be a business extension, funding for daily operations or growth opportunities. These are basically mutual debt fund that invests 80% of the total portfolio in corporate bonds.When you purchase a corporate bond, the company is basically borrowing funds. The company will repay the principal component after the maturity period as mentioned in the agreement. On the other hand, you get a fixed income, which is also known as a coupon. In India, coupon payments are made twice a year.

1. Public Sector & Banks: This is one of the types of corporate bonds that are mostly issued by top-rated companies, mostly public sectors and banks.
2. Low-rated Companies: The other type of corporate bond can be low-rated companies. These are the companies whose ratings are AA- or slightly below as provided by the CRISIL credit rating agency. For instance, an“A” rated corporate bond with one-year maturity has a 0.55% chance of defaulting and a CRISIL “A” rated bond with a 3-year maturity has a 4.78% chance of defaulting. There are chances of some bonds defaulting that could eventually affect the returns pattern.

Investors who want to earn fixed but higher income from a low-risk investment option can buy corporate bonds. As compared to other debt mutual funds, these are slightly safe and ensures capital protection.The time period generally ranges between 1 and 4 years, preserving the liquidity of the investor. These are characterized by higher credit risk, and they have a higher interest rate. The proportion of risk associated with the bond depends on the bonds managed by the portfolio managers.

1. Liquidity You can easily convert the returns derived from corporate bonds into cash. In terms of liquidity, a corporate bond is the best debt fund option for meeting short-term financial requirements. You can sell or buy a corporate bond anytime.
2. Variety An investor has the choice to select top corporate bonds based on tenure, as well as credit rating. For instance, if your investment objective is to opt for a low-risk financial instrument with a short-term tenure, then corporate bonds with shorter maturity tenure can be a suitable option. Similarly, the market also gives you the flexibility to opt for long-term and perpetual bonds as per your investment requirements.
3. Higher Returns In comparison to other debt mutual funds available in the market, corporate bond debt funds provide higher returns. The average returns could be in the range of 8% to 10%of fund managers who have chosen to invest only in top-rated companies. On the contrary, government bonds only yield half of it.
4. Safe Option Since corporate bonds fall under the debt fund category, they are certainly low-risk investment avenues. On the other hand, equity investments are relatively riskier. Therefore, if you are looking for mutual funds with fewer risk factors, corporate bonds could be the one.
5. Tax Efficiency The returns are subject to tax depending on your investment holding. If you have invested for less than three years, then you will be required to pay Short-Term Capital Gains Tax (STGC). If you are holding the bonds for more than three years, you are liable to pay 20% taxes as part of the Long Term Capital Gains Tax (LTCG)under Section 112 of the Indian Income Tax
6. Price of the Bond Every corporate bond has a specific price. You can purchase the same bond at different prices. Before investing, you should check how the bond price varies from the par value -this could give you a glimpse into the prevailing market movement.

The returns from the Corporate Bond Debt Fund can be higher considering you are focussing on top rated businesses. Just like any other mutual fund, these bonds operate in the share market. In case the value of a corporate bond in a mutual fund portfolio increases, the NAV of the mutual fund goes upwards. This means you are in profit. On the other hand, a fall in the NAV has a negative impact on the overall value of the mutual fund.

Investment in a mutual fund always exposes you to some amount of risk, which is also true in the case of corporate bond debt funds. For seasoned investors having sound market knowledge, Corporate Bonds can be not so challenging as they have a better understanding of the risks and prevailing conditions. New investors can preferably opt for high-rated short-term debt funds with lower credit risks.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.