There are many investment instruments available in the market now a day which offer decent returns with many other benefits. The risk of investing on these depends upon the type of instrument. Corporate bond funds are such an investment option which you may consider investing into. The details about the fund and its benefits are followed up in this post.
What are Corporate Bond Funds?
Corporate bond funds are basically mutual fund schemes which lend at least 80% of their money to the companies with good credit rating. These are the debt funds which invest in corporate bonds. Business organizations sell these corporate bonds to finance their short expenses, such as working capital requirements, advertising, payment to insurance premiums, etc. These are becoming popular among business organizations to raise money because the associated costs of these funds are lower then the bank loans.
Why Should We Consider Investing in Corporate Bond Funds?
As these are debt funds, the risk is low in investing these funds. These funds are ideal for investors looking for high returns with low risks on their investments. The time period for these funds range from 1 year to 4 years depending on the type of fund.
Normally the fund managers of these funds invest in the companies having high credit scores, since the chances of defaulting of these companies are less and therefore your money is protected. However, some corporate funds also invest in companies having not so good credit scores, for more returns. The risk on corporate bonds, therefore depend on the investment patterns followed by the respective portfolio managers. Government bonds are more stable in comparison to the corporate bonds, since it has negligible default risk.
These funds are mandated to invest at least 80% of their corpus in the highest- rated companies. Due to this reason, the corporate bonds are relatively safer than other debt funds.
You should consider both, safety as well as interest rates, before purchasing corporate bonds. There should be a balance between these two in a good corporate fund. It is possible that if the interest rates are high the bonds are risky and vice versa. The investor should carefully analyze this aspect before making any investment decision.
Types of Corporate Bond Funds
There are mainly two types of corporate bonds:
- The companies having excellent CRISIL credit ratings. These are generally top public sector companies and Navratnas.
- Companies having a slightly low credit rating.
The corporate bonds are also classified in the following manner:
- Convertible Bonds
These bonds can be converted into predefined stocks. If the investor feels that he is not getting good returns from corporate bonds, he/ she may convert these bonds into shares.
- Non- Convertible Bonds
These bonds cannot be converted into stocks.
Benefits of Corporate Bond Funds
The main benefits of investing in corporate bonds are as follows:
- Low Risk: the risk in investing in corporate bonds is low as these bonds normally invest in the companies having good credit rating and therefor the chances of default by these companies is almost negligible. Moreover, these bonds are basically debt funds and hence your money is protected when you invest in these bonds.
- High Interest: Corporate bonds give high interest as compared to government bonds and therefore ideal for the investors seeking good return with less risk.
- High Returns: If you compare these bonds with other debt instruments, then you will find that these bonds provide higher returns. On an average, a yield of 8- 10% is
- Liquidity: Corporate bond funds are raised to fulfill the short term requirements of the companies, such as, working capital, payment of insurance premium, etc. Therefore, the tenure of these funds is very short. This provides high liquidity to the investors.
How Can I Invest in Corporate Bonds in India?
You can buy corporate bonds directly from exchange where they are listed for selling or through a broker. The maximum cap for these bonds is Rs. 2 lakhs.
These bonds are issued by the corporations at face value. Companies list their bonds with the help of an investment bank, which underwrites and sells to the investors. These bonds give regular interest to the investors till maturity. The interest may be paid as fixed or floating rate. The investors can redeem these bonds at face value upon maturity. These bonds can also be traded in the secondary market also but the price of these bonds in the secondary market depends upon the number of interest installments due before the maturity date of the bond. In this case, the investor may receive less than the face value of bond. One important point to note is that it is not necessary that an investor invest directly in corporate bonds to have the benefits of the corporate bonds. He/ she can get exposure of these bonds by purchasing ETFs or mutual funds which invest in these bonds.
Some Best Corporate Funds to Invest in India
Although there are many options in the market, below are mentioned some best corporate funds to invest:
- HDFC Corporate Bond Fund
- Aditya Birla Sun Life Corporate Bond Fund
- ICICI Prudential Corporate Bond Fund
- Sundaram Corporate Bond Fund
- SBI Magnum Constant Maturity Fund
- ICICI Prudential Constant Maturity Gilt Growth
- L&T Triple Ace Bond Fund Growth
Taxation on Corporate Bond Funds
If you will hold your corporate bond funds for less than three years, than you have to pay short- term capital gain tax (STCG) on the earning from the bonds based on your tax slab. If you hold the corporate bond funds for more than 3 years, then section 112 of income tax act triggers, according to which 20% tax has to be paid on long term capital gain. Therefore, corporate bond funds having maturity more than three years will attract 20% tax on the income from capital gain from these bonds.
Conclusion
Corporate Bonds are low risk and medium to short term investment instruments, which provide you a steady income along with the security of you fund. The reason behind this is that these are debt funds which invest their corpus in the companies having high credit rating. These funds are mandated to invest at least 80% of their corpus in the highest- rated companies. Due to this reason, the corporate bonds are relatively safer than other debt funds. There is a tradeoff between safety and interest rates in these funds. Sometimes, the fund managers invest in low rated companies offering high interest rates, but the safety is compromised in this case. An investor should therefore make careful analysis of this aspect, before investing in these bonds. The benefits of corporate bond funds are low risk, high returns, high interest and liquidity. Therefore, the investors should be aware about this investment class to make best investment decisions.
