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What is Corporate Bond Fund? Advantages of Corporate Bond Fund

IndianMoney.com Research Team | Posted On Friday, March 13,2020, 04:48 PM

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What is Corporate Bond Fund? Advantages of Corporate Bond Fund

 

 

A bond issued by a corporate for the purpose of raising funds is called a corporate bond. It is a debt investment sold to investors. It is backed by the company’s physical assets or payment ability.

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What is Corporate Bond Fund? Advantages of Corporate Bond Fund​

What is Corporate Bond Fund?

Mutual funds that invest in corporate bonds are called corporate bond funds. Organizations need capital for day to day operations and business developments. They can raise funds via equity or debt. Debt instruments are preferred by organizations because of zero impact on shareholders. Loans tend to be expensive.

Corporate bonds are nothing but the money organizations borrow from investors. This will be returned on maturity. In the meantime, investors receive interest income termed as coupon. Coupon payments are carried out periodically.

See Also: Is It Good to Invest in Corporate Fixed Deposits?

Things To Know While Investing in Corporate Bond Fund

  1. Risk: This depends on the kind of bonds the fund manager selects. Bonds are generally categorized as low rated to high rated. High rated bonds give higher returns and the risk involved is low.
  2. Returns: Bonds are safe, fixed, high income generating instruments.  They are considered to be safer than equity funds. Higher the rating, safer the bond.
  3. Price: Price of bonds varies according to market movements. The same bond can be bought at different prices, depending on the time at which it is purchased. Ensure to check the par value of bond (amount paid by issuer at maturity) before purchase.

What are The Components of Corporate Bonds?

There are a number of instruments in which corporate bond funds invest. These are: commercial papers, bonds, debentures, structured obligations. The risk profile and maturity date of each component varies across instruments.

Why Should You Invest in Corporate Bond Fund?

Investing in corporate bond funds has the following advantages:

  • Growth potential of corporate funds is higher compared to government bonds.
  • They give inflation-beating returns.
  • They diversify your portfolio.
  • Compared to equity and property, the risk involved is low.
  • Bond holders are classified as creditors, hence enjoy preference over equity holders.
  • Less fluctuation in bond prices.
  • Fixed and predictable returns.

See Also: What is a Corporate Fixed Deposit?

How Corporate Bond Funds are Taxed?

Corporate bonds are taxed in two ways. According to the income tax act, if the investor holds the fund for less than 3 years, then they must pay short term capital gains (STCG) tax according to their income tax slab. If the bond is held for more than 3 years, then long term capital gains are taxed at 20% with indexation.

Risks of Investing in Corporate Bond Fund

Graded risks: Risk depends on the rating of the bond. Corporate bond funds must invest 80% of their portfolios in higher rated bonds. The remaining 20% can be invested in lower rated bonds. This encourages fund managers invest in these bonds to get higher returns though the risk involved is high.

Interest rate risk: Bond prices and interest are inversely proportional to each other. When interest rises, bond prices fall and vice versa. This is interest rate risk. All bonds have interest rate risk including corporate bonds which are influenced by market forces.

See Also: Why Invest in Corporate Fixed Deposits?

Top 5 Corporate Bond Fund 2020:

SL.NO

Fund name

AUM(cr)

3 year returns

5 year returns

1.

ABSL corporate bond

Rs. 17,587

7.59%

8.35%

2.

HDFC corporate bond

Rs 12,320

7.65%

8.51%

3.

ICICI prudential corporate bond

Rs 11,339

7.73%

8.52%

4.

Kotak corporate bond

Rs 4,418

8.19%

8.51%

5.

Franklin India corporate debt

Rs 1,404

8.74%

8.95%

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