Corporate bond funds form the crux of most debt investment strategies. The ability to provide better returns without putting capital at high risk makes the option suitable for various investment needs.
The popularity of these funds have soared after a series of credit events took the sheen off riskier debt funds. Corporate bond funds have gained prominence as they 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.
The best part is that they manage to deliver better returns than traditional saving instruments like FD without even having to take high risks.
When and how much to invest in these funds?
Ideally, an investor should put at least 40% of his/her investment in debt instruments. Half of this allocation should be invested in corporate bond funds (one may opt to put a portion of it in PSU and banking funds which are similar to corporate bond funds in many ways).
For short-term goals
Coming to specific scenarios, corporate bond funds are the go to investment option for short term goals. If an investor is aiming to make a down payment of a house in three-four years' time, investing in corporate bond funds is the ideal option. This is because they are less volatile than equity funds and generate higher returns than short-term funds.
For regular income
Corporate bond funds are an excellent choice for investors looking for a safe option to generate regular income without taking high risk. You can consider doing systematic withdrawal plan (SWP) from a corporate bond fund to generate regular income.
These funds hold several advantages over other regular options like FDs and long duration funds. The most significant is the right risk-reward ratio. FDs are less risky but returns are not good enough. On the other hand, longer duration funds carry higher risks but generate only marginally higher returns as compared to corporate bond funds.
For parking retirement corpus
Risk-taking ability diminishes with age. As one reaches the last phase of his/her working years, equity funds become unsuitable from the risk point of view.
It is hence advisable to invest maturing investments and new income sources in debt funds, especially corporate bond funds at this stage of life. If retirement is as close as 3-4 years, then corporate bond funds and PSU & banking funds are surely the best options.
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