After series of credit events, many investors prefer investing in schemes that hold high quality debt securities to avoid credit risk. A corporate bond fund does not take credit risk, as it invests at least 80% of its total assets in AA+ and above rated corporate bonds.
These funds mostly invest in high quality debt papers, government bonds and money market instruments. As a result, they provide adequate liquidity, low volatility and high credit quality.
Moreover, corporate bond funds offer superior returns as compared to traditional saving instruments like FD with minimum risk.
What are the key benefits of corporate bond funds?
Steady returns: Corporate bond funds have historically posted steady returns. Even during the recent financial market upheaval due to the coronavirus pandemic, the impact was not severe on corporate bond funds compared to many other scheme categories.
Tax Benefits: Investing in corporate bond funds for a period exceeding three years qualifies for the benefits of long-term capital gains tax at 20% with indexation. This makes corporate bonds a good alternative to FDs for investors belonging to the highest tax bracket as FD returns are taxed based on income slabs.
Who should invest?
The fund is suitable for investors who aim for stable returns and do not want to take credit risks. The investor should have an investment horizon of at least 2-3 years. Those who can remain invested for over 3 years can enjoy indexation benefits of long term capital gains taxation.
Long term investors can also consider investing in corporate bond funds to provide stability to the investment portfolio.
Where does it fits in investor portfolio?
Investment in debt funds should be the core part of one’s asset allocation to add stability to the portfolio. In the debt portfolio, there should be a combination of funds of different duration profiles ranging from a few months to a few years.
For medium term goals like funding an overseas trip, buying a new car or making a down payment of the new house, investors should consider corporate bond funds as they provide stable returns with limited downside risk and higher post tax returns. These funds can give good returns in different interest rate scenarios.
Experts take
Rahul Jain, Senior VP Research at International Money Matters
It is always good to have a certain portion of your portfolio, say 20% invested in corporate bond funds. However, one should be careful while choosing the fund. These funds come with a variety of strategies and portfolios. Even though all such funds invest mostly in high quality bonds, there is considerable difference on the risk and reward front. Expense ratio and portfolio diversification are other important factors you need to consider. Also, closely look at the remaining 20% of the portfolio that may not be into the highest-rated securities due to the flexibility given by SEBI to manage the corporate bond funds.
Vishal Dhawan, CEO of Plan Ahead Wealth Advisors
Corporate bond funds have a relatively lower duration and they also typically invest in high rated corporate bonds. This allows them to deliver stable returns. Investors who are seeking relatively lower volatility in debt portfolio and higher credit quality can go for these funds.
We believe corporate bond funds deliver attractive performance across market cycles. The fund makes sense for investors who are comfortable with idea of lending to the corporates.
