Corporate Bond Mutual Funds

If you are looking for an investment instrument that can give you fairly steady returns with minimal risk compared to equity funds, then corporate bond mutual funds will make the best choice. These funds primarily invest in high-rated corporate bonds from strong financial institutions. They are ideal for people who would like to earn regular income with minimal market risk.

What are Corporate Bond Mutual Funds?

Corporate Bond Mutual Funds are debt mutual funds, which invest a majority of portion into high-rated corporate bonds. As per the regulations, these funds will invest 80% of their assets in highly rated corporate bonds.

The companies issue corporate bonds in order to raise funds for business development, building infrastructure or for operating purposes. They make payments to the investors in terms of interests. Corporate Bond Mutual Funds pool money from different investors and use it for investing in such bonds. The professional managers select the bonds on the basis of criteria like credit worthiness, interest rates and other market conditions.

Features of Corporate Bond Mutual Funds

• Investment in High-Quality Bonds: Corporate Bond Mutual Funds mostly comprise high-quality securities such as highly rated corporate bonds. This decreases the default risk as compared to lower-rated debt securities.
• Stable Return Potential: While returns on investments are not guaranteed, these funds usually try to generate steady returns from interest received from the bonds.
• Professional Fund Management: The fund managers monitor market and interest rate trends and credit quality in order to effectively manage the portfolio..
• Diversification: Instead of investing in a single corporate bond, your investment is spread across multiple issuers and sectors, helping reduce concentration risk.

How to Invest in Corporate Bond Mutual Funds?

You can invest in corporate bond mutual funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose a suitable corporate bond mutual fund.

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why to Invest in Corporate Bond Mutual Funds?

• Relatively Lower Risk: These mutual funds carry relatively lower risk as compared to equity mutual funds since the fund manager makes investment high quality corporate bonds.
• Regular Income Potential: Corporate bonds generate interest income, which contributes to the overall returns of the fund.
• Portfolio Diversification: Adding debt funds alongside equity investments helps create a balanced portfolio and can reduce overall investment volatility.
• Better Than Traditional Savings Options: In the long run, these corporate bond mutual funds could provide return prospects better than traditional saving products even though there is no guarantee of any returns since it is market-linked.
• Suitable for Medium-Term Goals: These funds can be considered for financial goals such as purchasing a vehicle, planning a vacation, building an emergency reserve, or saving for future expenses over the next few years.

Taxation of Corporate Bond Mutual Funds

• Taxation of Fresh Investments (Onwards from April 1, 2023): The entire capital gain by selling corporate bond funds, irrespective of the holding period, would be short-term capital gain. This gain would be fully added to the individual's income and would be liable to Income Tax at the appropriate slab rate. There is no option for indexation.
• Taxation on Legacy Investments (Pre-April 1, 2023): The units held for or less than 24 months, then taxes will be applied according to the investor's individual income tax slab. However, for legacy units held by an individual for a period above 24 months, they will be considered LTCG and subject to a flat tax rate of 12.5%, with no indexation.