Risk-averse investors looking for higher returns than bank deposits can opt for corporate bond funds. These funds invest in the highest quality instruments, have lower credit risk than other debt funds, and are obliged to invest at least 80% of their corpus in corporate bonds rated AA+ or higher.
Corporate bond funds provide investors with an additional yield in addition to the corresponding maturity G-Sec yield that compensates for the credit and liquidity risks associated with the investor. These funds invest in higher yielding products than G-Secs and thus appeal to investors looking for higher yields in the fixed income space.
Akhil Mittal, senior fund manager at the Tata Mutual Fund, said accumulation in this category is fair and volatility is low compared to long-term funds. “So this category makes a good investment case for retail investors,” he says.
Things to evaluate before investing
Investors should be aware that bond funds are also subject to capital loss risk. This is evidenced by recent market events over the last couple of years, which have seen significant price cuts in several debt funds following downgrades and defaults of various issuers. Investors should look at current spreads offered by corporate bonds against corresponding maturity G-Secs as well as long-term historical spreads to get a sense of general valuations.
Dhaval Kapadia, Investment Advisory Director at Morningstar Investment Advisors (India), said those considering investing in corporate bond funds should assess the creditworthiness of the prospective fund’s portfolio under consideration. said. “Investors can review debt product exposures to AA and lower rated products to measure future fund-specific risk. Preferably consider a well-diversified portfolio with respect to issuers and products. you have to,” he says.
Fixed income funds require you to stay invested for a period similar to the duration of the fund. This helps them navigate interest rate cycle movements and smooth out the impact of interest rate changes. Corporate debt funds are one of the few categories on mutual fund platforms with flexible duration criteria, with industry durations ranging from just under a year to five years. These funds should be considered for 2-3 years to optimize investment.
Dwijendra Srivastava, Chief Investment Officer of Sundaram Mutual’s Fixed Income division, needs to confirm willingness for investment horizon and volatility (maximum drawdown of returns) before choosing the duration of a corporate bond fund to invest in. said. As he invests for a period of three years, he proposes the band for a duration of about three years. In this duration band, the yield curve is relatively flat and interest rate volatility is significantly reduced due to the duration of the investment,” he says.
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Change in credit rating
Changes in credit ratings are one of the key factors that determine the long-term performance of debt investments. A small change (one notch) may occur depending on a number of macro/micro factors related to the issuer, but this may not be a direct cause for concern. “Sudden deterioration in credit ratings (more than two notches at a time, or sustained downgrades in short time intervals) should be investigated with caution. You can consider reducing your exposure to the body,” says Mittal.
Income from the transfer of corporate bond funds is taxed under the heading “Income from capital gains” and the tax rate depends on the holding period of the fund. Neeraj Agarwala, a partner at Nangia Andersen India, said the tax benefits of investing in corporate bond funds will only increase if the holding period of the investment exceeds 36 months. “For corporate bond funds, holdings of more than 36 months will not only be taxed at a low tax rate of 20%, but will also be able to take advantage of indexation benefits, which will significantly reduce their tax liability,” he said. says.