Best Corporate Bond Mutual Funds in India

A corporate bond mutual fund is a type of mutual fund that invests at least 80% of its corpus in corporate bonds of high credit-rating which ensures minimal downside risk to the investors. A high credit rating indicates that the company is capable of repaying its debt obligations on time.

Since these funds invest in high-rated bonds, their credit risk is low aka the risk of company defaulting. However, they may be subject to interest rate risk depending on their duration. 

Scroll down to know more about corporate bond funds!

List of the Top Corporate Bond Mutual Funds

The table below illustrates all the top-performing corporate bond mutual funds in India, based on their 5-year annualised returns:

* NAV and returns data valid as of 19 August 2022

How do Corporate Bond Mutual Funds Work?

As an investor, if you want to diversify your investment portfolio and invest in debt instruments, then corporate bond funds are a good option to invest into. Let us get a brief understanding about what a corporate bond is. . 

Companies raise capital through multiple ways to fund their daily operations and also for their future growth. They can raise money by issuing equity shares or raising debt via term loans, bonds or other debt securities. An easy method for companies to borrow money is by issuing debt instruments like ‘bonds’ as it does not dilute their shareholding pattern. 

When a company issues a corporate bond to the investors, it essentially means that the company is borrowing money from these investors. The company must repay the principal amount along with interest to the investors on a predefined maturity date. 

Corporate Bond Funds pool-in money from a number of investors with a shared investment objective. The fund manager uses the collected amount to buy/invest  in corporate bonds issued by various corporations including the government entities. These funds are ideal for investment horizons of short to medium-term ranging from three to five years. 

These debt funds carry low credit risk as the underlying assets carry high credit rating. While they are less risky than equity funds and hybrid funds, they are not entirely risk-free. Due to their extended maturity period, these funds are susceptible to changes in interest rates and market volatility. In essence, Corporate Bond Funds operate like any other mutual fund. If the value of the corporate bonds in the fund’s portfolio increases, its NAV (Net Asset Value) and returns will also increase. On the contrary, if the NAV value falls, there will be a negative effect on the aggregate value of the mutual fund.

Features and Benefits of Corporate Bond Mutual Funds

The following are some of the important features and benefits of corporate bond funds:

• Returns

Returns on corporate bond funds are directly linked to the investments made by the fund manager. If the fund manager chooses to go risk averse and invests only in highest rated bonds, one can expect to earn annualised returns of 7% to 8% on average. At times, fund managers with considerable experience and skill can choose to invest in lower credit rating bonds (subject to the minimum cap of 80% in high rated bonds) to optimise the returns for the fund. 

• Risks

Corporate bond funds are subject to credit risks, market risks and liquidity risks. However, typically the risk profile of corporate bond funds is lower, as most of its total assets are invested in bonds with ratings of AA+ and above. This reduces the risks to a considerably low level as the probability of bonds with the highest credit rating to default is very low. 

• Liquidity 

 The demand for top rated debt instruments is high from the investors and such debt securities are easily tradable in the debt market just like the equity shares. This makes it easy for investors to enter and exit corporate bond schemes as per their requirements. 

Who Should Invest in Corporate Bond Mutual Funds?

Corporate bond funds invest in high quality corporate bonds which provide predictable returns with capital protection. They are ideal for investors who don’t have a risk appetite for equity investments and are looking for stable returns with minimal downside risk.  If you prefer investing in government bonds, these funds might appear riskier because they carry comparatively higher credit risks and thus higher returns. 

Taxation Rules for Corporate Bond Funds 

As it primarily invests in debt instruments, corporate bond mutual funds are taxed like any other debt fund.

Capital gains on sale on corporate debt funds are taxed as short term capital gains (STCG) and long term capital gains (LTCG) depending on the holding period of the investment. 

If you hold units for less than three years, you will be charged to STCG as per tax rates applicable to you. On the other hand, if you hold the units for more than three years you have to pay LTCG tax @ 20% after indexation benefit. 

Also Read: AMFI – Definition, Role, Objective & Importance

Things to Consider When Investing in Corporate Bond Mutual Funds

If you are planning to invest in corporate bond mutual funds, then you must keep the following things in mind before you invest your savings:

• Tenure: The underlying assets (corporate bonds) of these funds generally have a medium to long-term tenure. So, you should consider corporate bond funds as a long-term investment vehicle.
• Knowledge: Generally, investors who are well-versed with corporate bonds invest in these funds. Hence, you should build a basic proficiency in Corporate Bonds before investing to better understand the bond market and its associated risks.  

Final Word

Corporate bond mutual funds usually offer better returns compared to bank fixed deposits and government securities, as observed from the past performances of these funds. However, their returns can be affected by the economy’s interest rate movement. Further, they are not completely safe from credit-risk as even the highest-rated debt papers might default. So, you should invest in these funds if their investment objectives suit your financial needs and risk appetite.

Hope this blog answers all your queries about the best corporate bond mutual funds in India. 

Frequently Asked Questions 

Q1. How to invest in corporate bond mutual funds?

Ans: If you want to invest your money in corporate bond mutual funds, follow the steps given below:

Step 1: Register online or offline with a fund house. You can either login into their official website online or visit their branch for offline registration.

Step 2: For the online application, move to the ‘mutual funds’ section and select the corporate bond fund you wish to invest in.

Step 3: Enter the investment amount and the mode to invest through that is lump sum or SIP.

Step 4: Complete the KYC procedure by providing your PAN and bank details. 

Q2. What are some tax-free government bonds?

Ans: The following are some tax-free government bonds that are popular in India are:

• NABARD
• HUDCO
• NHAI
• IRFC
• REC
• PFC

Additionally, all of these offer relatively high returns.

Q3. How to select the right corporate bond mutual fund?

Ans: In order to choose the right corporate bond mutual fund, you can follow the step below:

Step 1- Select the fund house through which you can invest your money in a balanced manner.

Step 2- Evaluate the quality of portfolios to judge whether they give adequate liquidity or high-quality credits. 

Step 3- Look into the returns that competitive funds are offering. 

Q5. Are corporate bond mutual funds risky?

Ans: Compared to equity funds, corporate bond funds are safer as they offer predictable returns and reduced risk ratios. However, corporate bonds are also subject to credit (default) risk, even in the highest-rated debt papers. Further, they also carry interest rate risks that affect the funds’ total returns.