Best Corporate Bond Funds
About Corporate Bond Mutual Funds
Corporate funds are debt funds that invest 80% of the fund’s value in high-rated corporate bonds. Corporate bonds are moderate-risk financial instruments issued by businesses and organisations to raise funding from the market. These funds buy corporate bonds based on the credit ratings of the organisation.
Corporate bonds generate higher returns than traditional FDs while maintaining a safety level. They are issued by companies to access additional capital because it is usually more affordable than bank loans. These bonds are rated according to the company’s credit payment history, from AAA being the highest to D being the lowest. The higher the rating of the bond, the lower its chances of default.
How do Corporate Bond Funds Work?
Corporate bond mutual funds function within the stock market similarly to conventional mutual funds. When a corporate bond within the mutual fund’s portfolio appreciates in value, it leads to an increase in the fund’s Net Asset Value (NAV), resulting in profit realisation. Conversely, if the NAV declines, it has an opposing impact on the overall value of the mutual fund.
Features of Corporate Bond Mutual Funds
Corporate bond funds buy corporate bonds depending on the investment strategy. Investors must understand the important features of these funds before investing.
- Liquidity: Corporate bonds allow companies to meet their short-term fund requirements. They are useful for short-term investments. Moreover, high-rating corporate bonds are easy to obtain and sell as per the wishes of investors.
- Higher returns: The yields generated are significantly higher than other debt instruments in the market. Investors can expect an average return of 8–10% during the lifetime of the investment.
- Security: These funds are lower risk than equity investments, as, unlike stocks, debts pose a financial liability to the company. Companies must make timely repayments of interest while protecting the principal.
- Variety: Corporate bonds issued by companies are ranked from high to low, allowing various investors to pick according to their investment style.
Corporate bond investments are lower risk than equity investments, whose return depends on the profit or loss generated by the company. Corporate bonds are less risky – generating higher returns and better tax benefits.
Advantages Of Corporate Bonds Funds
Here are the advantages of investing in corporate bond funds.
- Bonds are relatively moderate-risk investments. Corporate bonds provide potentially higher returns, steady income, and the possibility of capital appreciation.
- The returns on these bonds are higher than those on other investments like FDs and government treasury bills. Therefore, there is a universal appeal to corporate bonds.
- Corporate bonds are highly liquid, especially those issued by high credit-ranking companies. A high credit rating ensures a low rate of default, which makes them highly sought-after investment options. There is always demand for these bonds in the market, and investors can buy or sell them at any time.
- Corporate bond funds offer diversification through investments in securities not directly influenced by stock market performance. Bond markets act separately, where the returns are affected by changes in interest rates. It allows investors to use corporate bonds to hedge against interest rate fluctuations and currency rate movements.
Comparing the YTM, or Yield to Maturity value, at the time of investing will help you make an informed choice regarding the best corporate bond funds. YTM measures the total return you expect from your bond/debt investment if you hold it till maturity.
Risks involved in corporate bond funds
The risk exposure of corporate bond funds is higher than that of ultra-short-term and liquid funds. With corporate bonds, there is always a risk of the issuer defaulting on their obligations. The default risk goes up with low-rated securities and with longer maturities. This risk is called credit risk.
If the fund manager buys only high-rated corporate bonds, the returns will be average but assured. On the other hand, if you invest in slightly low-rated bonds, the returns will be higher since the companies have to offer a higher coupon rate to attract investors.
There is also the chance of interest rates rising, causing the bonds in the portfolio to lose their value. It is called “interest rate risk.”
Factors To Consider Before Investing in Corporate Bond Funds
- Risk Tolerance: Assess your risk tolerance as corporate bond funds can vary in risk levels. Higher yields often come with higher risks, so choose funds that align with your risk appetite.
- Credit Quality: Investigate the credit quality of bonds within the fund. Higher-rated bonds are generally safer but may offer lower returns, while lower-rated bonds can provide higher yields but come with increased default risk.
- Duration and Interest Rate Risk: Consider the fund’s duration, as longer durations make investments more sensitive to interest rate changes. If you’re concerned about rising rates, opt for shorter-duration funds.
- Fees and Expenses: Be aware of management fees and expenses, as they can eat into your returns. Choose funds with competitive expense ratios to maximise your gains.
- Diversification: Diversify your investments across different bond issuers and sectors to spread risk. Ensure the fund manager follows a strategy that aligns with your diversification goals.
By paying attention to these factors, you can make informed decisions when investing in corporate bond funds.
Who Should Invest in Corporate Bond Funds?
Today, corporate bonds are one of the most lucrative investments. The risk level of these funds is low to suit the profile of risk-averse investors. Investors with an investment horizon of 2 to 3 years can work their money in corporate bond mutual funds for high returns while maintaining liquidity. Those wanting indexation benefits may want to stay on longer.
Corporate bonds are more risky than government bonds but less risky than equity funds. Investors looking to lower their overall mutual fund portfolio risk can also invest. The risk level of these funds depends on how the respective fund managers manage the fund’s risks.
Taxability of Corporate Bond Funds
The tax incidence of these funds is the same as other debt funds, categorised as short-term and long-term based on the tenure of the investment.
If you are holding your corporate bond funds for less than 36 months, then you must pay short-term capital gain tax, calculated as per the investor’s income tax slab.
Long-term capital gain tax is applied when the investment tenure is more than 36 months. Long term capital gain tax rate for debt funds is 20% after indexation benefits.
When an investor earns dividends on their corporate bond fund, the dividends are considered a part of their taxable income and are subject to taxation at the applicable rate based on their income tax bracket. Also, there is a 10% TDS on the dividend amount if it exceeds Rs. 5000 in a financial year.
How to Invest in Corporate Bond Funds?
Investing in Corporate Bond Funds is an easygoing process through your Angel One account. Here’s a simplified version of the steps:
Step 1: Log in to your Angel One account using your registered mobile number. Verify the OTP and enter your MPIN.
Note: If you don’t have an Angel One Demat account, you can open one quickly by completing the KYC procedure and providing the necessary documents.
Step 2: Choose the right fund for your needs and risk tolerance by considering these factors:
- Search for your preferred fund or explore Angel One’s recommended options.
- Review the fund’s historical performance, tax implications, sectors, and stocks it invests in.
- Estimate potential returns using the calculator.
- Assess the fund’s risk level and match it with your risk tolerance.
- Check the fund’s ratings from reputable agencies (typically rated on a scale of 1 to 5).
- Consider the fund’s expense ratio to understand the cost of investing.
Step 3: Once you’ve decided on the fund(s) to invest in, access your Angel One account, navigate to the Mutual Funds section, and locate your chosen fund. Since this may be a long-term investment, be cautious when making your selection. At this stage, consider the following:
- Decide between a lump sum investment or a monthly SIP.
- Enter the investment amount and choose your preferred payment method (preferably UPI or net banking).
- For SIP investments, set up a mandate for hassle-free future instalments
Top 5 Corporate Bond Funds to Invest in
| Name of the Fund | AUM (₹ Cr) | Expense Ratio | Average YTM | Category YTM | CAGR 3Y | CAGR 5Y |
| HDFC Corp Bond Fund | 32373.58 | 0.36 | 7.47 | 7.44 | 6.84 | 7.18 |
| ICICI Pru Corp Bond Fund | 29117.59 | 0.35 | 7.65 | 7.44 | 7.21 | 7.16 |
| Aditya Birla SL Corp Bond Fund | 24978.52 | 0.33 | 7.51 | 7.44 | 7.01 | 7.29 |
| SBI Corp Bond Fund | 20414.80 | 0.34 | 7.54 | 7.44 | 6.54 | 6.65 |
| Kotak Corporate Bond Fund | 14149.79 | 0.34 | 7.47 | 7.44 | 6.76 | 6.75 |
The above-mentioned funds are for informational purposes only and are not recommendations. The funds are ranked based on AUM as of January 2025.
HDFC Corporate Bond Fund
The HDFC Corporate Bond Fund has the highest AUM among the 5 funds, at ₹32,373.58 crore, and an expense ratio of 0.36%, which is the highest in the list.
The fund’s average YTM is 7.47%, in line with the category YTM of 7.44%. Over the past 3 years, it has delivered a CAGR of 6.84%, ranking 4th in 3-year performance, while its 5-year CAGR of 7.18% ranks 3rd in the list.
ICICI Pru Corporate Bond Fund
The ICICI Pru Corporate Bond Fund has an AUM of ₹29,117.59 crore and an expense ratio of 0.35%.
The fund’s average YTM is 7.65%, the highest among the 5 funds, while the category YTM stands at 7.44%. Over the past 3 years, it has delivered a CAGR of 7.21%, the highest in the list, while its 5-year CAGR of 7.16% ranks 4th.
Aditya Birla SL Corporate Bond Fund
The Aditya Birla SL Corporate Bond Fund has an AUM of ₹24,978.52 crore and an expense ratio of 0.33%, which is the lowest among the 5 funds.
The fund’s average YTM is 7.51%, slightly higher than the category YTM of 7.44%. Over the past 3 years, it has delivered a CAGR of 7.01%, ranking 2nd in 3-year performance, while its 5-year CAGR of 7.29% is the highest among the 5 funds.
SBI Corporate Bond Fund
The SBI Corporate Bond Fund has an AUM of ₹20,414.80 crore and an expense ratio of 0.34%.
The fund’s average YTM is 7.54%, slightly above the category YTM of 7.44%. Over the past 3 years, it has delivered a CAGR of 6.54%, the lowest in the list, while its 5-year CAGR of 6.65% also ranks 5th.
Kotak Corporate Bond Fund
The Kotak Corporate Bond Fund has the lowest AUM among the 5 funds, at ₹14,149.79 crore, and an expense ratio of 0.34%.
The fund’s average YTM is 7.47%, in line with the category YTM of 7.44%. Over the past 3 years, it has delivered a CAGR of 6.76%, ranking 3rd in 3-year performance, while its 5-year CAGR of 6.75% ranks 4th.
Mutual Funds Calculators
Corporate Bond Funds FAQs
Are corporate bond mutual funds high-risk?
Should I invest in corporate bond funds?
What are the expected returns of corporate bond funds?
- The average yield on these funds is 8-10%. However, the performance depends on the performance of the companies selected by the fund manager.
- Although the returns are lower than those of equity funds, corporate bond funds earn higher returns than other fixed-income investments.
What are the risks involved in investing in corporate bond funds?
Are corporate bond funds taxable?
- Corporate bond investments are treated as debt funds since 80% of the corpus is invested in different company bonds.
- Short-term capital gains arise when the investment period is less than 36 months. The gain is added to the income and taxed as per the income tax slab.
- On the other hand, long-term capital gains are taxed at a 20% rate after indexation.
How much money should I invest in corporate bond funds?
