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Corporate Bonds Mutual Funds - Must For All

Authored On: 08-Jun-15

Last Modified: 08-Jun-15

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Article details about Mutual Funds schemes investing mainly in Corporate Bonds and importance of such funds to all investors.

  • Corporate Bonds are issues by corporates

  • When you buy such bonds, you essentially provide a loan to corporates and you receive the interest from them for the same.

  • Understand the basics of corporate bonds in below figure.

Corporate Bonds

  • Corporate Bonds are issued by corporates such as say manufacturing companies, housing finance companies

  • Corporate Bond Scheme of Mutual Fund invests into several different corporate bonds such that:

 

  • Overall fund corpus is distributed in several different issuers bonds

  • Each of those bonds carry different maturity and interest payment structures

  • Preferably, invests in only those bonds which are high rated by accredited credit rating agencies

  • Interest payments

Advantages of investing in Corporate Bond Mutual Funds are:

 

  • Far secure investment compared to investing in stocks

  • Corporate bonds pay more interest than Government Bonds

  • In current interest scenario, the return on corporate bond fund exceed return given by PPF

  • Investing in more than three years gives additional benefits of long term capital gains and indexation

  • Investing in corporate bond fund at a time when interest rates are likely to fall [like current times] ensures a return at comparatively higher rates.

Before choosing corporate bond fund, it is preferable to verify following as preferred items:

  • Bond portfolio should contain more than 95% bonds in top 2-3 categories of credit ratings

  • The corpus of the scheme should be reasonably good. There is no specific number, but scheme with corpus of say rupees 500 crores is much better than scheme with corpus of 50 crores

  • Scheme should hold bond portfolio from diverse issuers 

  • Percentage holding in any single issuer should be maximum 3-5%, thereby reducing risk of interest default by issuers on overall returns

  • Verify the performance returns over at least five years and compare the same with peers of the scheme from other mutual fund companies' corporate bond fund schemes

You can verify most of these details from mutual fund companies website detailing 'fact sheet' about specific fund or from numerous websites dedicated to mutual fund investing.

Typically, you can remember following guidelines as our preferences. . .

 

  • Have one corporate bond mutual fund with dividend re-investment option - for shorter to intermediate term investing horizon

  • Have another corporate bond folio from another mutual fund with 'growth' option - for longer term investment horizon

  • Invest in corporate bond fund, instead of parking your money just as cash, while waiting to invest in stock market, while waiting for stock market to correct

  • Parking funds, as mentioned above, should be in Growth option of corporate bond fund scheme, to take advantage of capital gains adjustment during tax computation

  • When you book profits in stock market, instead of re-investing profit again in stock market, invest in corporate bond fund, especially if the stock market is at top

   Summary Lines:

  • Corporate bond mutual fund is a must option for any investor, as it offers benefits of higher interest rate, benefits on taxation (upon certain holding period) 

 

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