Corporate bond funds: A combination of moderate risks and above-average returns

Although equity mutual funds are the most sought after mutual funds by Indian investors, those are not the only mutual fund investment option available. There are some funds that invest in securities other than equity, like in government bonds, corporate securities, call money, certificate of deposits. These fixed income securities are known to general regular income. Mutual funds that invest in such money market instruments for income generation are referred to as debt funds. As per market regulator Securities and Exchange Board of India (SEBI), there are sixteen sub categories under debt funds. This categorization has been done for investors to be able to distinguish between the different schemes and choose what fits their interest.

Corporate bond fund are one such debt fund category preferred by those investors who carry a moderate risk appetite. That’s because a corporate bond fund allocates at least 80 percent of its total assets in AAA and AA+ rated bonds. As per data released by Association of Mutual Funds of India, corporate bond funds received an overall investment of a whopping Rs. 11,910 crore since the month of July, 2020. The ongoing coronavirus pandemic has led market volatility to its peak, thus forcing a lot of investors to rebalance their mutual fund portfolio with corporate bond funds. Debt funds that invest in lower credit rating bonds generally do so with the hope of seeking higher capital gains. However, such investments may not be able to withstand turbulent market conditions and hence investors prefer shifting to corporate bond funds as they invest in bonds with a far better credit rating.

But that doesn’t make corporate bond funds a completely safe investment option. After all they are mutual funds and we all know of the fact that investments made in mutual funds do not offer guaranteed returns. This is why investors are expected to determine their risk appetite before making an investment. Apart from this, they should also take a look at the past performance of the fund to get a fair idea about whether the fund holds the potential to help them with their investment objective. Now if you are someone who has been a conservative investor and looking to shift from those investment avenues to something contemporary, they can consider investing in corporate bond funds. Not only do these funds carry a diversified portfolio, but they also hold the potential to offer better returns as compared to traditional investments.

The ongoing pandemic has made banks reluctant to offer credit to companies with low credit ratings. Hence, investing in corporate bond funds makes a lot of sense at this point of time at least. Corporate bond funds have been performing better than other debt fund categories simply because they hold the majority of their assets in high rated company bonds. So instead of investing in funds that invest in low rated bonds with the hope of fetching higher returns, investors should focus on generating consistent returns. Because mutual fund investments should generally be avoided who have a short term investment horizon. Long term investments shun the possibility of investments getting affected by daily market upheavals. To invest systematically in corporate bond funds at regular intervals one can start a monthly SIP. A Systematic Investment Plan allows investors to invest a small amount every month and help them get closer to their investment objective gradually and steadily. One can even take the help of an online SIP calculator to get a rough estimate of their capital gains through their monthly SIP investments. If you feel that you need further assistance in making an investment decision, seek the help of a financial advisor.