What are Corporate Bond Funds
Corporate bond funds are open ended debt mutual funds investing in highly rated corporate bonds. As per SEBI guidelines, corporate bond funds have to invest at least 80% of their total assets in AA+ and above rated corporate bonds.
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Why Invest in Corporate Bond Funds
- Lower credit risk due to exposure to highest-rated corporate bonds
- Top-rated corporate bonds offer higher yields than government bonds with same maturity profiles
- Have lower interest rate risk than long and medium term bond funds
- Usually generates higher returns than fixed deposits
- Have higher tax efficiency than fixed deposits for those in the 20% and 30% income tax brackets with investment horizons exceeding 3 years
Table of Best Corporate Bond Funds
| Fund Name |
Returns (%) |
||||
| 1 year | 3 year | 5 year | 7 year | 10 year | |
| L&T Triple Ace Bond Fund | 8.25 | 9.59 | 8.70 | 8.45 | 8.04 |
| Axis Corporate Debt Fund | 9.21 | 8.09 | — | — | — |
| HDFC Corporate Bond Fund | 9.07 | 9.04 | 8.81 | 9.05 | 9.00 |
| ABSL Corporate Bond Fund | 9.54 | 9.07 | 8.70 | 9.03 | 9.20 |
| ICICI Prudential Corporate Bond Fund | 8.64 | 8.62 | 8.35 | 8.54 | — |
| IDFC Corporate Bond Fund | 8.94 | 8.28 | 8.25 | — | — |
| Sundaram Corporate Bond Fund | 8.14 | 8.73 | 8.61 | 9.38 | 8.02 |
| Kotak Corporate Bond Fund | 7.46 | 8.44 | 8.30 | 8.92 | 8.58 |
| Invesco India Corporate Bond Fund | 7.49 | 8.24 | 7.96 | 7.76 | 7.92 |
| Edelweiss Corporate Bond Fund | 0.85 | 0.18 | 3.19 | — | — |
| Benchmark (NIFTY Corporate Bond TRI) | 5.59 | 7.11 | 7.02 | 7.55 | 7.46 |
| Corporate Bond Fund
Category Average |
7.36 | 7.59 | 7.71 | 8.32 | 8.18 |
(Data as on February 11th 2021 : Source: Value Research)
Investment Strategies of Best Corporate Bond Funds
1. Axis Corporate Debt Fund
- Looks for opportunities from credit spreads
- Invests in corporate bonds with 1-3 years maturity
- Typically maintains duration range of 2-4 years with a high quality bias
- Reduces potential risk by spreading its exposure through different sectors
- Takes a cautious approach during sector selection
- Uses liquidity analysis, in-depth review of companys’s finances and interactions with their management for security selection
- Follows pure accrual play with buy and hold approach
- Avoids active duration calls in lower rated bonds
- Strictly follows internal limits at issuer and rating levels
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2. L&T Triple Ace Bond Fund
- Invests in high credit quality debt securities in AAA-rated and equivalent rated corporate bonds
- Aims to primarily invest in corporate bonds maturing in 2028 and 2029
- Overall portfolio structure and diversification aims to contain risk at moderate levels
- Invests only in companies after thorough in-house research
3. HDFC Corporate Bond Fund
- Focuses on generating returns mainly through interest accruals
- Investment decisions are guided by factors including credit quality, liquidity, interest rates and their outlook
- Seeks to maintain Macaulay Duration between 2-4 years
- Seek to maintain an average maturity of 1-5 years depending upon the interest rate outlook & term spreads
4. ABSL Corporate Bond Fund
- Identifies high quality corporate bonds offering superior levels of yield at lower levels of risks
- Undertakes rigorous in-depth credit evaluation of the securities before investment
- Credit evaluation criterion includes company’s operating environment, past track record, future prospects as well as their short and long-term financial health
- Analyses the macro economic conditions including the political and economic factors affecting liquidity and interest rates to predict the likely direction of interest rates and position the portfolio
5. ICICI Prudential Corporate Bond Fund
- Seeks to provide both accrual income as well as potential mark-to-market returns, though the latter would have a relatively smaller component in the overall returns
- Intends to derive potential benefit from any changes in short-term interest rates
- Undertakes credit risk management by predominantly investing in debt instruments of high credit quality
- Intends to maintain duration between 24 to 36 months range
- Seeks to generate accrual income predominantly through buy & hold strategy
- Aims to generate optimum yield with lower duration risk
- Suitable for those looking to invest in shorter maturity portfolio
6. IDFC Corporate Bond Fund
- Currently follows a ‘roll down’ investment strategy as a tactical approach
- Looks for opportunities from credit spreads among the range of available corporate bonds
- Endeavours to increase investment in money market securities in a rising interest rate scenario
- Will invest in debt securities with longer maturity when the interest rates are expected to fall
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7. Sundaram Corporate Bond Fund
- Primarily invests in AAA rated corporate bonds and Sovereign bonds
- Generates returns through both accrual income and capital appreciation
- Invests in highly liquid papers
8. Kotak Corporate Bond Fund
- Primarily invests in corporate bonds of varying maturities across the credit spectrum
- Seeks opportunities across the credit curve
- Aims to benefit from available superior yield available from time to time
- Invests in instruments with acceptable credit risk but with least chances of default
- Maturity profile of the portfolio constituents selected on the basis of interest rate outlook, rating stability and prevailing market conditions
9. Invesco India Corporate Bond Fund
- Primarily invests in AAA rated corporate bonds across sector and industries
- Keeps its options open regarding the tenure of the securities
- Evaluates the securities through the rigorous internal credit appraisal process before investing in them
- Follows passive investment strategy with selected securities running down their individual tenure to reduce volatility caused by active duration calls
- Does not indulge in taking active investment calls
10. Edelweiss Corporate Bond Fund
- Aims to generate income from rising bond prices and declining interest rates
- Invests in AA+ and above rated corporate bonds across the maturity spectrum
- Focuses on credit quality, risk-adjusted returns and liquidity
- Aims at portfolio duration range between 1 year and 5 year with median range between 2 year and 3 year
- Aims for prudent portfolio allocation to capture credit spreads
Risks of investing in Corporate Bond Funds
- Portfolios with longer maturities may increase the interest rate risk during rising interest rate regime
- Exposure of up to 20% in debt securities rated below the highest credit ratings might impact returns during credit events
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Who should invest in Corporate Bond Funds
- Investors seeking to benefit from highest rated corporate bonds with investment horizons of 1-4 years
- Those seeking higher returns with lower volatility
- Investors in the higher income tax slabs seeking greater tax efficiency than fixed deposits for their investment horizons exceeding 3 years
- Those seeking higher rate of returns than government bonds with lower interest rate risk
10 Comments
I am 75 years now and have some Bank Deposits maturing shortly. I have been depending on the interest from these deposits for my day to day expenses. Since Bank deposit rates have moved down sharply, my income will get reduced by 25% plus if I renew these deposits. Where should I invest now to get a regular quarterly income of around 8.5% plus to sustain my expenses?
Hi Bhaskar,
A couple of small finance banks are offering interest rates of 8.5-9.00% p.a. on some of their FD tenures. Given your age and cash flow profiles, income certainty and capital protection would be your primary concern. Hence, we suggest you open FDs in those banks with a quarterly payout option.
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As small finance banks are scheduled banks, deposits of up to Rs 5 lakh maintained by each customer of these banks are insured under the depositor insurance program of DICGC, an RBI subsidiary. Hence, FDs of up to Rs 5 lakh opened with small finance banks are as safe as those opened with Public Sector and large private sector banks. Try to spread your FDs across multiple small finance banks in such a way that the cumulative deposits in each of these small finance banks do not exceed Rs 5 lakh.