How Do Corporate Debt Funds Generate Returns?

Corporate bond funds are a such debt fund category generally considered by those mutual fund investors who carry a moderate appetite for risk. That’s because a corporate bond fund allocates at least 80 percent of its total assets in AAA and AA+ rated bonds. Corporate debt funds are sometimes used for rebalancing a mutual fund portfolio especially during the current times of the ongoing global pandemic that has affected the performance of the financial markets and global economies worldwide. Corporate 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 volatile market conditions and hence investors prefer shifting to corporate debt funds as they invest in AAA and AA+ rated bonds.

How does corporate debt fund generate capital appreciation?

Corporate debt funds work similar to the way lending money in exchange for interest and long term capital appreciation works. A corporate debt fund aims to generate capital appreciation by investing a minimum of 80 percent of its total assets in AAA and AA+ rated bonds and other fixed income securities. These funds aim to generate income and interest on the principal investment amount during the term of the debt fund.
A positive graph in the performance of a corporate bond fund denotes increase the NAV of the fund, thereby generating profits. On the other hand, a decrease in NAV has a negative impact on the portfolio value of the corporate debt fund.

It is the responsibility of the fund manager to craft a feasible investment strategy that will work out in accordance with the investment objective of that debt fund and help it beat its benchmark. These funds generally invest in high credit rated bonds that tend to improve their credit rating over a stipulated time period.

Start a SIP in corporate debt funds
If you wish to achieve success with your corporate debt fund investments, consider starting a SIP. Systematic Investment Plan or SIP is a systematic investment approach towards corporate debt fund investments. Individuals seeking long term capital appreciation through regular, disciplinary investments usually opt for SIP. To start a SIP, all an investor has to do instruct his / her bank, following which every month on a fixed date, a predetermined amount is debited from your savings account and electronically transferred to your corporate debt fund. When the NAV of the fund is low, you are allotted more units and when the NAV is high, a smaller number of units are allotted to investors. This results in the investor benefiting from rupee cost averaging. Also, you may continue investing in corporate debt funds through SIP until your investment objective is met. Those investors who are unsure about how much they need to invest at regular intervals can refer to an online SIP calculator.
Now that you know how corporate funds generate capital appreciation, planning on investing in these debt schemes? Before investing, make sure that you are investing a consistent performing fund that has a proven track record. Check for the fund’s past performance and if possible, compare it to other funds that fall in the same category. Also make sure that the corporate debt fund that you are about to invest in has a feasible expense ratio. A fund with a high expense ratio might affect your capital gains in the long run.

If you are new to mutual funds or financial planning in general, do consult a financial advisor. Also, only invest if the corporate debt fund scheme holds the potential to help you achieve your life’s short term financial goals.