Defining corporate bond debt funds
Corporate bond funds are mutual funds where at least 80% of the fund’s assets are invested in corporate bonds. Businesses sell these to fund urgent expenses, such as working capital needs, marketing, and insurance premiums. As the costs associated with corporate bond funds are less than those associated with bank loans, they are gaining appeal as a means for businesses to access critical capital.
Types of corporate bond funds
In general, there are two different kinds of corporate bonds that a mutual fund may invest in:
- Funds that solely invest in high-quality debt securities. Banks and government agencies are two examples.
- Funds that invest in firms with lower credit ratings. Debt papers rated ‘AA-‘ or below.
Who should invest in corporate bonds?
Due to capital protection, mutual funds that invest in corporate bonds are less risky. It favors risk-averse investors expecting high rewards. The tenure of the funds is typically between one and four years, ensuring investor flexibility.
Credit risk boosts the interest rates on corporate bonds. Government bonds are safer investments. The corporate bond risk is determined by portfolio managers. Businesses with low ratings are more liable to default than those with excellent ratings.
Features and benefits of corporate bond funds
Investing in these funds may provide investors with several benefits, including the following:
Higher return
Relatively speaking, corporate bond funds deliver substantially higher returns vis-a-vis alternative debt instruments available in the market. Typical yields can range between 8% and 10%.
Liquidity
As corporate debt funds finance the short-term requirements of businesses, they are by nature short-term. Mutual funds composed of corporate bonds are available for purchase and sale by investors at any time. This makes corporate bond funds highly liquid, allowing them to be converted to cash on demand.
Security
Corporate debt funds have a lower associated risk than shares, as the former poses a financial obligation (liability) to the company. Equity investments, in contrast, are susceptible to losses or gains made by a firm in the course of a single fiscal year. Hence, they carry a greater level of risk.
Variety
Corporate bonds can be classified based on fund tenure and credit rating of firms selected. Hence, they offer a variety of choices to potential investors who can choose the investment based on their needs.
Risk factors and returns
It is the bond portfolio that determines risk. If the money manager chooses only high-rated corporate bonds, the risk of corporate default is reduced.
If the fund manager handles it properly, investing in corporations with poor ratings may provide higher returns. To tempt investors, such as mutual funds, enterprises with poor credit provide higher coupon rates. Seasoned portfolio managers invest a significant portion of their total assets in funds during favorable market conditions and then withdraw them in anticipation of market fluctuations.
How do corporate bonds make returns?
The process of investing in a corporate bond fund is quite similar to the process of investing in other kinds of mutual funds. For instance, if the net asset value (NAV) of a mutual fund rises due to an increase in the price of a corporate bond that is included in the fund’s assets, the fund will generate more revenue. A decrease in NAV, on the other hand, has a detrimental impact on the value of the mutual fund.
Conclusion
Bonds issued by corporations provide a low-risk alternative to investors seeking a short-term investment choice. They generate returns that are higher than those offered by government bonds. Before investing in a corporate bond fund, it is important to weigh the upsides and downsides.
FAQs
Is it good to invest in corporate bonds?
The interest rates on investment-grade corporate bonds are very close to reaching multi-year highs, which makes these bonds desirable to investors who are anticipating a return on their money.
How do corporate bond funds work?
The process of investing in a corporate bond fund is similar to the process of investing in other kinds of mutual funds. For instance, if the net asset value (NAV) of a mutual fund rises due to an increase in the price of a corporate bond that is included in the fund’s assets, the fund will generate more revenue and vice versa.
What is an example of a corporate bond?
Infosys has launched a bond of Rs 1,000 face value. The bonds will mature in 10 years and pay an annual interest rate of 8%.
Is a corporate bond fund better than FD?
Yes, If you have a time horizon of three years or longer, it is likely that the returns on corporate bond funds will be higher than that offered by bank fixed deposits.
Is it good to invest in corporate bond fund?
Investing in a corporate bond fund can provide income and diversification, but it comes with some risk. Consider your financial goals and risk tolerance before investing.
Is corporate bond better than FD?
Corporate bonds offer potential tax benefits and can provide slightly higher returns than bank fixed deposits (FDs). However, they come with market risk, making FDs a more stable but taxable option.
What is an example of a corporate bond?
An example of a corporate bond is a Tata Motors Finance Solutions bond with ISIN INE477S08100. Corporate bonds are issued by companies to raise funds and pay periodic interest to bondholders.
How risky is corporate bond fund?
Corporate bond funds carry several risks, including credit risk (issuer’s ability to pay), interest rate risk (price fluctuations), and market risk. Investors should assess their risk tolerance before investing in these funds.
