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Everything You Need to Know About Corporate Bond Funds

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  • Everything You Need to Know About Corporate Bond Funds

    Are you looking for a long-term fixed income investment? Do you want a tax-efficient investment compared to fixed-term bank deposits? You can invest in corporate bond funds. It is a debt fund that invests at least 80% of its assets in high quality corporate bonds. Banks have offered lower interest rates on time deposits in recent years. It forces investors to seek safe alternative investment avenues and offers higher after-tax returns than bank FDs. Should you invest in corporate bond funds?

    What are Corporate Bond Funds?

    Corporate bond funds such as debt mutual funds invest a minimum of 80% of their assets under management in corporate bonds with a credit rating of AA+ and above. However, they may have small holdings in government securities and money market instruments.

    Credit rating firms such as ICRA, CARE and CRISIL assign credit ratings to financial instruments or funds based on the financial strength of the issuer.

    Macaulay corporate bond funds have a duration of two to five years. However, corporate bond funds are affected by interest rate fluctuations in the economy, which is called interest rate risk. It's because they invest in longer duration corporate bonds.

    Should you invest in corporate bond funds?

    You could invest in corporate bond funds to achieve your medium-term financial goals. It is an ideal investment for a time horizon of two to three years. Also, investors who are conservative and prefer fixed income instruments can look to corporate bond funds.

    You might also consider corporate bond funds if you're in the higher income tax brackets. It offers returns similar to fixed-term bank deposits. However, they are more tax efficient because these funds are taxed in online mutual fund investment portal.

    Long-term capital gains over three years for debt funds are taxed at 20% with the indexation benefit. Adjusts the purchase price of the debt fund for inflation, thus offering higher after-tax returns than bank FDs.

    Points to check before investing in corporate bond funds?

    You should check the portfolio of corporate bond funds to gauge the quality of the bonds in your portfolio. For example, you should invest in corporate bond funds that have high credit quality bonds in their portfolio.

    Corporate bond funds invest at least 80% of their assets in high credit quality instruments. However, you must check the credit quality of the financial instruments in the remaining 20% of the portfolio.

    You should also check the duration of the bonds in the corporate bond fund portfolio through mutual fund tracking for corporate. It's helpful to understand that interest rate fluctuations in the economy affect corporate bond funds that have longer-duration bonds in their portfolio.

    Check the expense ratio of corporate bond funds and opt for those with a lower expense ratio. It's the cost of managing your investment, and investing in funds with a lower expense ratio increases your overall returns over time. You can check the history of the mutual fund house and fund manager before investing in the corporate bond fund.

    You could invest in corporate bond funds to diversify your portfolio into fixed income securities. However, you should understand credit risk and interest rate risk before investing in these funds. You can opt for corporate bond funds from asset management companies with large assets under management (AUM). Additionally, these AMCs can handle high redemption pressure from large investors during periods of excess liquidity. Simply put, conservative investors who fall into the higher income tax blocks may opt for corporate investors bond funds.

    About Us

    CAMS GoCORP is a corporate investment portal designed to take investing by corporates to a new level. Discover simplicity, ease and safety in preparing and submitting Mutual Fund transactions, tracking investments and much more, with CAMS GoCORP. CAMS GoCORP is the only gateway you will need to transact across multiple Mutual Funds serviced by CAMS. No more multiple forms, faxes, transaction slips etc.

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