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Corporate Bonds Funds explained
What are Corporate Bonds Funds?
A Corporate Bonds Fund is a Mutual Fund that invests at least 80% of its portfolio in Corporate Bonds with high credit ratings (usually AA and above). These are debt instruments issued by companies to raise capital. Unlike equity, these do not offer ownership but provide fixed income in the form of interest payments over a period of time.
Features of a Corporate Bonds Fund
| Feature | Description |
|---|---|
| Debt Mutual Fund category | Corporate Bond Funds fall under the Debt Mutual Fund segment regulated by SEBI. |
| Minimum 80% in high-rated bonds | As per SEBI rules, at least 80% of the portfolio must be in AA+ and above-rated corporate bonds. |
| Moderate risk profile | Carries lower credit and interest rate risk compared to other Debt Funds investing in lower-rated securities. |
| Medium-term investment horizon | Ideal for investors with a horizon of 2–5 years, balancing safety and returns. |
| Liquidity | Generally offers better liquidity than traditional corporate Fixed Deposits (FD). |
| NAV sensitivity to interest rates | Fund value may fluctuate slightly based on market interest rate movements. |
| Regular disclosure | Investors receive transparent and regular updates on portfolio holdings and credit ratings. |
How do Corporate Bonds Funds work?
Corporate Bond Funds pool money from various investors and invest it in bonds issued by companies. These companies borrow capital for expansion, operations, or refinancing existing debt and, in return, promise to pay interest (called the coupon) at regular intervals. The fund earns this interest and may also benefit from price appreciation if bond values rise. The fund manager ensures the selection of bonds with good credit ratings to balance returns and minimise risk.
Benefits of investing in Corporate Bonds Funds
- Stable income generation: Offers predictable income through interest payments.
- Better returns than traditional deposits: May provide higher yields compared to bank Fixed Deposits, especially over medium-term durations.
- Capital preservation: Investments in high-rated debt instruments reduce default risk.
- Portfolio diversification: Adds balance to equity-heavy portfolios and reduces overall risk.
- Professional management: Fund managers actively track and adjust the portfolio based on market conditions and credit outlook.
How should you invest in a Corporate Bonds Fund?
- Define your investment horizon: Ideal for investors with a 2–5 year outlook.
- Assess your risk profile: Suitable for moderately conservative investors looking for steady returns.
- Track interest rate trends: Corporate Bond values move inversely with interest rates; consider current and expected rate cycles.
- Use SIPs for consistency: Systematic Investment Plans (SIPs) reduce the impact of market volatility and encourage disciplined investing.
- Review the fund’s credit rating exposure: Ensure the majority of investments are in AA-rated and above instruments for lower credit risk.
Taxation rules of Corporate Bonds Funds
As per the rules effective from April 1, 2023, and continuing in FY 2025-26, any capital gains from these funds—whether held for a short or long period—are treated as short-term. This means the gains are added to your total income and taxed as per your applicable income tax slab. The earlier benefit of long-term capital gains with indexation is no longer available for new investments.
Also Read : How to evaluate Mutual Fund performance?
Conclusion
Corporate Bond Funds offer a balanced approach to earning fixed income while managing risk. With a focus on high-rated corporate debt, they provide a stable investment option for those aiming to diversify their portfolio or seek income without the volatility of equity markets.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
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