Are Corporate Bond Funds Safe To Invest In India?
According to the AMFI survey, mutual funds are among the top investment choices. However, with the recent volatility in global markets, there is a renewed interest in corporate bond funds as an investment option. India’s leading credit rating firm, Crisil, predicts that the domestic supply of corporate bonds will double to Rs. 65-70 lakh crore by fiscal 2025, with the financial sector accounting for around 50% of this expansion.
However, with India’s share market showing signs of volatility, it can be challenging for us to decide which way to go. Here we try to find the answer to the question, “Are corporate bond funds safe to invest in?”
What Are Corporate Bond Funds?
A company issues a corporate bond to raise funds for many of its business operations, for instance, expansions or mergers. A corporate bond fund is a mutual fund that invests over 80% of its pooled money in such corporate bonds.
Corporate bond funds are an option for people who want to invest in debt mutual funds for at least three years and want to do so in a “relatively safe” way.
How Do Corporate Bond Funds Work?
Corporate funds invest about 80% of the money into the best credit-rating companies. These bonds trade on the stock market in the same way that other mutual funds do.
When the value of a corporate bond held by a mutual fund rises, the fund’s NAV rises, and investors get a financial reward. A decline in NAV, on the other hand, reduces the total value of a mutual fund.
Types of Corporate Bonds
There are two main categories for corporate bond funds:
Type 1: Funds investing solely in high-rated PSU (Public Sector Units) and bank debt papers.
Type 2: Investment funds that put their money into firms with weaker credit ratings (often AA- and below).
When we compare the two corporate bond fund investments, type two has a more significant default risk.
For example, a CRISIL “A” rated debt paper with a 1-year residual maturity has a 0.56% default probability. Still, a debt paper with the same rating and a 3-year residual maturity has a 4.79% default chance.
Key Elements of Corporate Bond Funds Investments
The following are some things that make corporate bond funds investments stand out:
- Purchasing Corporate Debt
You can directly invest in debt papers like nonconvertible debentures, commercial papers, and structured obligations through corporate bond funds.
- Bonds’ Return
Bond prices often change because they are tied to the time left until maturity and the interest rate. The main thing that affects bond prices is the outlook for interest rates in the economy.
Interest rate changes affect returns; however, funds under one year old will be less affected. The price will fluctuate more if the remaining period is longer. Bond prices will rise if deposit interest rates fall.
Yield-to-maturity (YTM) is the total return on a bond at its maturity. The current yield is the return on a bond each year. We can calculate any invested corporate bond funds’ percentage rate using YTM.
- Portfolio Allocation & Exposure
Usually, a corporate bond fund would put up to 90% of its total assets into corporate debt instruments. The other 10% would be spread among government securities and other safer options.
Since corporate debt funds are formed to address a company’s short-term funding needs, they are also short-term in nature. Corporate bond mutual funds may be purchased and sold at the investor’s discretion. This makes the financial resource very liquid, enabling the owner to convert it to cash whenever necessary.
Is Investment in Corporate Bond Funds Safe?
Corporate bond funds are, in general, safe investments. However, no investment is entirely risk-free. There is a chance that bond issuers won’t meet their financial obligations.
The default risk increases exponentially with time until maturity, so low-rated securities have the most risk. If your fund manager mainly invests in firms with high ratings, you can expect an average return of 8–10% with negligible risk.
However, you may get a good investment return on an underrated but well-run fund. Several companies try to get investors by, for example, giving slightly higher interest rates. Nonetheless, it is best to analyze the fund returns before investing in corporate bond funds.
Best Corporate Bond Funds in India
Investing in large AMC (asset management company) corporate bond funds is a good way to lower risk. Large AMCs stick to the fund’s investment goal and buy high-rated corporate bond papers to lower the risk of default. Here is a list of top corporate debt mutual fund schemes.
|FUNDNAME||AUM||EXPENSE RATIO (%)||RETURNS (%) 1 YR||RETURNS (%) 3 YR|
|HDFC Corporate Bond Fund||Rs. 21,313 cr||0.32||2.7||6.51|
|Kotak Corporate Bond Fund||Rs. 8,585 cr||0.30||3.14||5.98|
|ICICI Prudential Corporate Bond Fund||Rs. 14,780.98 cr||0.25||4.15||6.73|
|IDFC Corporate Bond Fund||Rs. 16,518.35 cr||0.31||2.16||6.11|
|L & T Triple Ace Bond Fund||Rs. 6,778.94cr||0.34||1.37||6.37|
Why Invest in Corporate Bond Funds?
Corporate debt mutual funds are a popular choice.
- Security: Corporate bonds are a safer way to invest in companies than stocks since they provide investors with predictable income. Investing in corporate bonds may make a portfolio more ‘defensive,’ meaning that returns will be more consistent and less volatile overall, particularly during market volatility.
- Enjoy higher returns: In the longer future, corporate bonds will likely provide investors with a higher excess yield than FD and government bonds. Corporate bonds are also well-suited to profit from the extended global economic recovery because of the solid business fundamentals.
- Taxation: Withdrawing from an investment within three years will attract short-term capital gains tax (STCG) at the applicable income tax slab. For investments in debt funds held for more than three years, the long-term capital gains (LTCG) tax rate is 20% with indexing.
When it comes to investment, AAA-rating corporate bond funds are a safe and reliable choice. They offer substantial returns and are relatively low risk compared to other debt mutual funds.
Corporate bond funds are the ideal investment vehicle for risk-averse investors looking to stay invested for at least three to four years.
With a prudent fund manager Investing in stable firms with high ratings, you can expect a return of 8-10% with negligible risks.
To summarise, these funds are the ideal mix of security and liquidity. Investing in reputed corporate bond funds can considerably lower the risk of default and earn substantial returns.
At Koshex, we help investors with personalized suggestions based on their needs and financial requirements. Sign up with Koshex to learn more about corporate bond funds as an investment option.
- How risky is it to invest in corporate bond funds?
Corporate bonds are safer than debt mutual funds because they preserve capital. Corporate bond funds buy good debt securities to help reach your financial goals faster.
- How can I purchase corporate bonds in India?
Corporate bonds are ideal for portfolio diversification since they provide regular income at a higher rate than government bonds. You may buy corporate bonds through online brokerage sites.