What are corporate bond funds?

Corporate bond funds are a type of debt fund that primarily invests in bonds issued by private companies with an AA+ and above credit rating. Imagine these bonds as loan agreements or IOUs, with companies borrowing money from investors (like you and me) and agreeing to repay the principal amount along with interest over a set period. By pooling our money with other investors, these funds offer access to a diversified portfolio of corporate bonds, spreading out the risk and optimising the return potential.

Types of corporate bond funds

Corporate bond funds typically invest in companies with high credit ratings. This could include top public sector companies or private enterprises with a credit rating of AA+ and above.

Within this, fund managers can choose the portfolio composition based on various parameters. They may choose to invest in short-duration, medium-duration or long-duration bonds or a combination of these, to balance risk and return potential.

While corporate bond funds are subject to interest rate risk and the risk of default, the high credit quality of the underlying bonds can mitigate default risk. Meanwhile, the interest rate risk will depend on the maturity profile of underlying securities in the portfolio. Usually, bond prices are inversely proportional to interest rates. When interest rates rise, the value of bonds falls and vice versa. Bonds with a longer maturity tend to be more sensitive to interest rate changes.

Features and benefits of corporate bond funds

Having understood the corporate bond funds meaning, let's see why one may consider investing in such funds. Here are the benefits of such funds:

Relatively steady income potential: Corporate bonds generate regular interest payments, providing a potentially reliable source of income for those nearing retirement or seeking to supplement their current earnings.

Relatively low volatility: While not risk-free, corporate bond funds tend to be less volatile than equity funds, making them suitable for investors who prioritise less volatility over high-octane growth.

Diversification: By investing in a range of corporate bonds, these funds provide investors with diversification benefits, reducing the impact from any individual issuer.

Regular inflow of funds: Investors in corporate bond funds tend to receive regular Income distribution cum capital withdrawal (IDCW), offering a steady income inflow of funds. This makes them suitable for those looking for a reliable source of cash flow.

Professional management: Fund managers employ their expertise to actively manage the portfolio, making dynamic decisions based on market conditions and credit quality assessments.

Conclusion

Corporate bond funds are an invaluable option for investors seeking a blend of steady income (IDCW), moderate growth potential, and relative stability of capital. Remember, thorough research, careful consideration, and professional guidance are essential when venturing into the realm of corporate bond funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.