Corporate Bond Funds – Why they are Popular and Attractive?

Until recently, Cash deposits in banks were the most popular form of investment in India. But the bank’s declining interest rates have forced investors to look for other options. Due to the uncertainty in the stock market and ignorance in the securities market, the average investor is still confused about what options are available in the debt market according to his age, financial situation and risk-taking mentality, and is ultimately deprived of satisfactory returns.

Corporate Bonds

Various companies issue these bonds to finance their operations, expansion activities etc. Credit rating agencies such as CRISIL, CARE, ICRA rate these instruments in India on the basis of their degree of safety, which is defined as their ability to pay the amount on maturity. The risk-return trade off is witnessed here as well, for companies with good rating offer less yield.

Purpose of Corporate Bond Funds

  • Corporate bonds are a very good return tool in the debt market. Corporate bonds are non-convertible debentures. When large corporates need short-term, medium-term, or long-term capital for their business growth or for day-to-day expenses, they sell such bonds. Selling such bonds is a form of borrowing.
  • It is more convenient for companies to market such bonds than to borrow money from banks. This is because the process of borrowing from banks is more time consuming and expensive.
  • Ordinary investors or domestic and foreign investment institutions invest in such bonds which means they are lending to this company.
  • In return, the company pays interest to the investors at a fixed rate and returns the original capital before maturity.

Ratings

Before investing in corporate bond funds or any debt fund, check the credit rating of the instrument in which the fund is invested. These credit ratings are rating agencies like Crisil, Icra, Fitch. The companies that sell bonds in the market; They are studied in depth, comprehensively, extensively. And they determine the rating of the companies impartially, according to that rating then the investment in that company is decided how risky / how safe it is.

You can see the rating of companies and their credit risk from the below table.

RatingCredit Risk
AAAHighest Safety
AAHigh Safety
AAdequate Safety
BBBModerate Safety
BBModerate Risk
BHigh Risk
CVery High Risk
DExpected to Default

Risk Factor & Returns

Always try to invest in funds has a maximum (in fact all) of AAA, AA grade. Because one organization studied a period of 11 years from April 2009 to March 2020; It turned out that the default rate for three-year AAA rated companies is negligible as 0.04%, while the same rate for AA rated companies is as low as 0.039%. Corporate bond funds are considered more secure than any other type of debt fund. Because 99% of that investment is in top rated means AAA, AA grade instruments.

Benefits

  • Corporate bonds funds is that they are also high in terms of liquidity.
  • The maturity period of any debt instrument is fixed. If it is long and interest rates are rising, the value of such bonds in the market decreases. But if they are short to medium term, up to three years, the changing interest rates do not have much effect on the price of bonds.
  • About 94% of investments in corporate bond funds are in such short term instruments. This allows the fund manager to rebalance his portfolio and get higher returns.

At the end of 5 January 2021, looking at the returns given by various debt funds over a period of 1 year, it can be seen that corporate bond funds are the best.

CategoryReturns
Low Duration Funds6.33%
Medium Duration Funds7.35%
Short Duration Funds8.91%
Dynamic Duration Funds9.66%
Banking & PSU Funds9.74%
Corporate Brand Funds9.86%

In terms of taxation, debt funds are profitable for a period of three years. So, considering the satisfactory returns, comparatively more security and tax deduction, some part must be invested in this type of fund. Currently the following five corporate bond funds are in the lead.

Scheme NameCrisil Rank1Y2Y3Y5Y
ICICI Prudential Corporate Bond FundAAA9%9%9%8%
DSP Corporate Bond FundAAA8%9%
IDFC Corporate Bond FundAA10%9%9%8%
Axis Corporate Debt FundAA11%9%9%
Aditya Birla Sun Life Corporate Bond FundAA10%10%9%9%
Returns data as on: 30-Apr-21

Conclusion

Corporate bond funds are good for those who have a 3 to 5 year investment outlook. At the same time, investors do not want to take too much risk in the market. However, it is important to note that companies with higher ratings may also have lower ratings in the future. Such companies may also default on payments.

Take a Look

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Why Corporate Bond Funds in India so popular

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