Corporate Bond Mutual Funds – Concepts, Types, Features, Benefits & moreLast Updated Date: Nov 16, 2022
Know everything about Corporate Bond Mutual Funds here.
Looking for the best debt mutual fund scheme that offers you better return at a minimal risk level? No wonder you have got the right place.
Here we’ve brought you the most popular MF plan, the “The Corporate Bond Funds” that invest predominantly in debt assets.
Though, the thing that is exponentially raising the demands of these funds is its highest return expectancy.
What are these funds? And how these funds prove to be profitable and advantageous?
In this article, we have compiled all the information in one place so that you can find a better insight into this Mutual Fund’s effectiveness. So without losing a moment, let’s get into the article.
What are Corporate Mutual Funds?
Corporate Bond Mutual Funds is an excellent MF scheme. As the name sounds, these mutual funds predominantly invest in corporate bonds- a type of debt securities.
80% of the total portfolio of these funds comprises of corporate bonds investments.
In brief, Corporate Bonds, also known as NCDs (Non-Convertible Debentures), are a type of bonds issued by a public or a private company to pay their short-term expenses.
For instance, companies sell these bonds to pay off their advertising, insurance, and working capital needs. As compared to bank loans, these bonds help companies to raise capital at a minimal cost.
It is an economical alternative and that’s why many companies issue corporate bonds. But how do these mutual funds work? We’ll discuss next in this article.
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How do Corporate Mutual Funds work?
Whenever a business or a company seeks more funds to fulfill their working capital requirements, they often take bank loans.
But in most instances, these loans become very expensive due to heavy interest rates. Hence, companies find bonds or debentures another best alternative.
For example, when a person invests in a company’s bond security, it means that this company is borrowing money from that person.
Upon the maturity period, the company will repay the entire principal amount to the investors, along with interest accumulated over such investments.
This payment term also refers to a coupon payment that is often made after six-month intervals. It creates a win-win situation for both companies and investors.
Companies collect these funds to pay off their expenses, and risk-averse investors earn better returns.
However, corporate bond mutual funds are also split into two categories that prove that these funds often fail to outperform as per one’s expectations.
Find details of other Types of Funds here
Types of Corporate Bond Mutual Funds
Now let’s take a quick overview of two types of Corporate Bonds Mutual Funds schemes –
Type one: Fund that predominantly invests in highly rated debt paper comes under type one Corporate Bond Funds category. For example – Public Sector Units and Banks.
Type two: Funds that predominantly invest in comparatively lowest-rated debt investments come under ‘type two’ of corporate bond mutual funds category—for example- debt papers with below ratings.
In most instances, the fund managers prefer to invest in the highest-rated bonds rather than lower-rated securities.
For example, investors invest in the highest-rated bonds with a risk of 0.60%, and the rest invest in a lowest-rated bond with a 5.00% chance of default risks.
Since the low rated bonds comprise of highest default risk, it can reduce the portfolio returns.
Top Features of Corporate Mutual Funds
Here are the list of top features of Corporate Bond Mutual Funds –
Returns obtained from corporate bond mutual funds depend upon the portfolio profile. What types of bonds does the portfolio carry?
If it carries the highest rate bonds that mean returns will be higher. On the other hand, if it holds the lowest-rated bonds, the returns will be lower.
But we can’t ignore the fact that securities with the highest return expectancy can be risky as well.
Corporate bond funds invest in debt securities, e.g., debt papers. In most instances, these debt investments seek a higher maturity period, which raises the interest rate risk expectancy.
Moreover, fund managers often invest in the lowest-rated debt instruments, which raise the credit risk expectancy.
The interest rate fluctuations decide the overall behavior of corporate bond funds. For instance, the volatility will be increased if the interest rates are rising for a long duration.
That’s why smart investors never forget to consider the period of bonds before investment. A longer period of a corporate fund can negatively affect the performance of a portfolio.
That’s why short term corporate bonds are highly preferred.
A corporate bond portfolio comprises 80% of debt investment, e.g., corporate debt papers. However, the portfolio manager usually invests 90% in corporate bonds, but not more than that.
The rest of the portion is allocated to other safest instruments, e.g., government securities, to reduce the risk expectancy in a portfolio.
The fluctuation in the market interest rate isn’t a good sight for bond prices with a longer maturity period. For instance, a higher interest rate will lead to a fall in bond prices and vice-versa.
The best way to analyze a corporate bond’s performance is to evaluate the difference between prices and the par value of the bond.
Interest or Coupon
Companies or businesses that issue bonds pay a certain amount of interest to the investors who purchase these bonds.
These interest amounts received against the investment on these bonds are identified as a coupon payment.
Since lots of factors influence the prices of a bond, the coupon rate can vary from time to time.
Corporate Bonds are a type of debt securities. Since Corporate Bond Mutual Funds comprise the maximum portion of bonds and debentures, they are taxed like debt mutual funds.
The tax rate on these mutual funds varies, based on the investment held less than three years or more than three years.
Find details of all types of Debt Funds here
Who Should Invest in Corporate Bond Funds?
Corporate Bonds can be a fantastic choice for risk-averse investors with higher returns cravings. These funds generate fixed but safe returns for investors.
As compared to other funds, these funds are considered more advantageous because, at a minimal risk ratio, they offer you higher returns.
Though, we can’t ignore the fact that these funds aren’t entirely safe. The risk associated with these funds is also considerable. These funds are prone to credit risk and interest risk.
Especially if an investor is willing to invest in these funds with a long-term vision in mind, he can invite severe losses. Corporate Bonds are affected by market interest, which can fluctuate over time.
It proportionately amplifies the volatility impact on a portfolio. Therefore, the investment horizon should be kept equal to or less than four years.
However, if you are planning to invest for up to three years, you pay less tax. Altogether it isn’t the completely safest option but a great mutual fund alternative.
Any investor can invest in these mutual funds but make sure you first hit decent research on a particular investment plan.
Things to Consider before investing in Corporate Bond Funds
It isn’t necessary that every mutual fund scheme comes with advantageous features. Indeed, there are few things vital for every investor to consider.
Similarly, if you are planning to invest in Corporate Bond Mutual Fund scheme, these four points will help you to come across the best decision.
Try To Grab Some Knowledge First
Don’t invest in corporate bond mutual funds in haste. Before you invest, try to grab some decent knowledge on every fundamental that makes CBM funds better or less favorable options.
However, it can be a bit confusing for a new investor to start investing in such fund categories. If you are also new, make sure you first grab knowledge.
A Well-Informed Investment Horizon
Corporate Bond Funds can’t be a great choice for an extensive long-term vision because market volatility can chop off the return value.
Even though you try to invest for the short-term, the tax-related issues may arise that can raise problems for you. Only investors who have set a medium-term investment decision can get expected returns.
For instance,- you should invest in corporate bond mutual funds for less than four years or more than three years.
Check Out the Returns
If you want to identify a fund’s performance, the return value offering is the primary element to know.
Though, there is no guarantee that the future returns will be good as the past returns because many factors can affect the overall performance of a portfolio.
Possibly, it may perform better, but in unfortunate situations, less favorable results can be expected.
Evaluate the Top Funds in the Market
The most excellent way to find out the best performing corporate bond mutual fund is having a quick over of the top funds’ schemes in the market.
Compare them, which one is offering higher returns and lowest risk expectancy. How much are they genuine? Get a proper insight into every company, and come up with the right decision.
Check out all types of Hybrid Funds here
Benefits of Corporate Bond Mutual Funds
Here are few important benefits of Corporate Bond Mutual Funds –
- Corporate Bonds Mutual Funds promise higher returns to the investors. These funds invest in debt securities that are a bit riskier as compared to other debt instruments. Hence it generates higher returns for the investors. Moreover, these funds also offer regular payments to investors in terms of interest.
- These funds invest in a mix of debt assets. Every debt instrument comprises a unique risk profile, such as debt, commercial papers, bonds, and structured obligations. In all these debt instruments, you will find a different risk and return profile.
- Corporate Bond Funds offer you attractive returns. The returns obtained per annum on these bonds are identified as yield. For example, if the current rate of the particular bond is Rs 2000 and its par value is 20%. That means the bonds issuing company will pay Rs 400 interest to the investors per annum.
- If you invest up to 3 years, you get an added advantage related to tax.
Shortcomings of Corporate Bond Mutual Funds
Here are the few drawbacks of Corporate Bond Mutual Funds
- Default risk is the main factor defining the shortcoming of these funds. For instance, if the company’s default payment is high and ratings are also high, it doesn’t mean whether the company will offer you guaranteed returns.
- The interest rate risk is another most critical factor to consider. Owing to this, your investment can work against your expectations. The interest rate can negatively affect the coupon payments obtained from these funds.
- Market Volatility is the riskiest factor for almost all types of investment. Suppose you are investing for a long-term vision in these mutual funds for more than four years. It can raise trouble for you because market volatility can bring a drastic change in the market interest that can affect corporate bond mutual funds’ par value.
Corporate Bond Mutual Funds – Conclusion
In this review, we have broken down all the points identifying the Corporate Bond Mutual Funds’ success and shortcomings.
Corporate Bond Mutual Funds can be the safest option, but market volatility can raise concerns. For instance- if an investment is held for more than a year, the interest rate movement may invite problems.
However, in most instances, there is no guarantee. Make sure you choose a reliable mutual fund house where your investments are used for the right purposes under smart and experienced people’s supervision.
Moreover, the risk isn’t that horrible like the risk you experience on equity investment. But it is slightly higher than other debt investment plans because these funds offer you relatively higher returns.
This article has shared a thorough discussion on every aspect that makes Corporate Bond Mutual Fund special and a good option. Now, the ultimate decision is up to your preferences.
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