What Are Corporate Bond Funds & Who Should Invest?
This blog will tell you everything you need to know about corporate bond funds right from the meaning of corporate bonds, how corporate bond funds work, who should invest in them, and how you can get access to the best corporate bond funds. using Cube Wealth.
February 12, 2021
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Debt funds are known to invest in various debt and money market instruments like treasury bills, commercial paper, repos, corporate bonds, etc. But certain debt funds like corporate bond funds only invest in , you guessed it, corporate bonds!
In this blog, we will simplify corporate bond funds, cover their pros & cons, and talk about how you can invest in the best corporate bond fund using Cube Wealth.
What Is A Corporate Bond?
A corporate bond is issued by a large organization/corporation, in exchange for a loan. It pays a fixed interest to the lender for the duration of the bond.
The fixed interest rate is also known as the “coupon rate”. Companies with a higher credit rating generally have to pay a lower interest rate while the opposite is true for companies with a lower credit rating.
The logic here is simple - a company with a strong credit profile may be reliable and can easily pay back the debt on time whereas a company with a poor credit rating may default at any time.
The principal amount is returned to the lender once the duration of the bond ends (maturity). A corporate bond fund builds a portfolio of corporate bonds with the highest credit rating (AAA rated).
The fact that a large corporation may require a loan may come as a surprise to many. But conventional wisdom states that taking on short term debt is more convenient than getting more shareholders on board.
Large organizations may need a loan to:
Fund short term expenses
Fulfil salary commitments
Start a new division or expand operations
A corporate bond is a broad term that and in general, it can be used to describe:
Secured Bonds: The company pledges collateral
Unsecured Bonds (Debentures): There’s no collateral pledged
Let’s find out how corporate bonds work.
How Does A Corporate Bond Fund Work?
A corporate bond fund allocates at least 80% of its portfolio to highly rated corporate bonds. The rest of the portfolio can include stocks and other debt securities.
The fund manager will build a portfolio of corporate bonds that lend money to big corporations. The corporate bonds will generate a fixed interest in exchange for the loan.
Thus, the returns that an investor will earn is directly linked to the interest rate generated by the overall portfolio of a corporate bond fund.
Corporate bond funds have been known to generate 7-9% returns over 3+ years that’s better than traditional investment assets like a bank Fixed Deposit and an average savings account.
Corporate bond funds are considered to be safer than equity funds and other debt funds like 10-year Gilt funds but riskier than debt funds that invest in government securities like Banking and PSU debt funds.
Investors may benefit from the relative safety and reasonable returns of a corporate bond fund. Thus, you must speak to a Cube Wealth Coach to know if corporate bond funds will add value to your portfolio.
Moreover, it is advisable for investors to evaluate their risk profile and investment goals before investing in any mutual fund. An app like Cube Wealth can help you understand both with the detailed risk analysis quiz.
Factors To Consider Before Investing In A Corporate Bond Fund?
While corporate bond funds may have low default risk, they do carry a certain amount of interest rate risk. Interest rates in India may fluctuate due to market conditions or RBI’s periodic adjustments to the interest rate.
Your portfolio represents your investment goals. You must evaluate your current investments to understand if you need to invest in corporate bond funds.
You can check out Cube Wealth’s free MF analysis tool and get a detailed report emailed to you. Consulting a Cube Wealth Coach can also help you see if a corporate bond can help you achieve your investment goals.
Debt fund taxation rules are applicable to corporate bond funds since they fall under that category:
Short Term Capital Gains
< 3 years
As per I-T slab
Long Term Capital Gains
> 3 years
How To Invest In The Best Corporate Bond Funds?
The Cube Wealth app helps you invest in the best corporate bond fund with advice from Wealth First, Cube’s mutual fund advisory partner. Every month, WF curates a list of top mutual funds for Cube users.
Moreover, Wealth First also advises on when to buy and sell mutual funds. You can invest in the best corporate bond fund using 2 methods:
1. Systematic Investment Plan
In a SIP, you invest a small sum of money every month. This small chunk of money accumulates into a large corpus over time. Moreover, this corpus will earn compound interest.
The Cube Wealth app helps you start a SIP conveniently with the QuickSIP option:
on stock picking, poring over excel sheets, financial news, analyzing market trends, tracking the Sensex, researching company fundamentals, comparing mutual funds, reading financial reports, trying to predict the future & losing your sanity!