What are corporate bond funds?

Corporate bond funds, also known as non-convertible debentures, are debt funds that invest at least 80% of their capital in companies with the best credit ratings. Credit ratings offered by rating agencies such as CRISIL or Value Research can be used to assess the safety of corporate bonds. AAA rated companies are the safest and have the lowest credit risk compared to AA rated companies. Since corporate bond funds invest primarily in high-rated instruments, their credit risk is lower than that of other debt funds. Corporate bond funds have consistently outperformed other debt categories, even in today’s turbulent financial markets. The previous year, corporate bond funds provided an average return of almost 7%. Their average returns over three and five years are above 8% and 9%, respectively. Which is definitely better than the interest rates on FDs offered by big banks like SBI, HDFC. Axis and ICICI.

4 best corporate bond funds by yield

Since corporate bond funds are well known for their medium-term investment tools, you need to invest for at least two to three years to earn higher returns than bank FDs. The four best corporate bond funds to invest in 2021 are listed below.

Sun Life Aditya Birla Corporate Bond Fund

The fund currently has Rs 23,971 crore in assets under management (AUM) and a net asset value of Rs 87.13 as of June 4, 2021. National Bank for Agriculture and Rural Development, Rural Electrification Corp. Ltd., Housing Development Finance Corp. Ltd., HDB Financial Services Ltd., State of Madhya Pradesh are among the top holdings of the fund. The Sun Life Aditya Birla Corporate Bond Fund direct plan has an expense ratio of 0.46 percent. Sun Life Aditya Birla Corporate Bond Fund has a 5-star research value rating, indicating that it has the potential to outperform Bank FD returns.

ICICI prudential corporate bond fund

ICICI Prudential Corporate Bond Fund Direct Plan Growth is a mutual fund program of ICICI Prudential Mutual Fund. The fund currently has Rs 19,706 crore in assets under management (AUM) and a net asset value of Rs 23.77 as of June 4, 2021. GOI, National Bank for Agriculture and Rural Development, Housing Development Finance Corp. Ltd., Rural Electrification Corp. Ltd. ., and LIC Housing Finance Ltd. are among the main holdings of the fund. The fund has an expense ratio of 0.27%. Value Research gave this fund a five-star rating, indicating that it can avoid losses and offer good returns in a downturn in the market.

Kotak Corporate Bond Fund

Kotak Corporate Bond Fund Standard Growth is the debt mutual fund product of Kotak Mahindra Mutual Fund. The fund currently has Rs 9,310 crore in assets under management (AUM) and a net asset value of Rs 2,934.42 as of June 4, 2021. State Bank of India, Rural Electrification Corp. Ltd., Reserve Bank of India, Tata Capital Financial Services Ltd. , and Tamilnadu State are among the top holdings in the fund. The fund has a cost ratio of 0.66 percent and a 4-star rating from Value Research. Although the fund has a good rating, the fund’s three-year, five-year and ten-year returns are all above the average returns for the category.

Axis Corporate Debt Fund

Axis Corporate Debt Fund Direct Growth is a debt program of Axis Mutual Fund. As of June 4, 2021, the fund had Rs 4,089 crore in assets under management (AUM) and a net asset value of Rs 13.75. National Bank for Agriculture and Rural Development, State Bank of India, Motherson Sumi Systems Ltd., India Infradebt Ltd. and Tata Capital Ltd. are among the main holdings of the fund. Value Research has given the fund a three star rating and the expense ratio for this fund is 0.24%. This suggests that the fund has generated respectable returns, but the stability with which it has done so is questionable. You can invest in this fund if you don’t mind being dissatisfied in times of bad returns.

Should we invest?

People looking for a short term, low risk investment option can simply choose corporate bond funds with a shorter maturity period. Corporate debt funds have a lower risk profile than equity funds, and they offer high liquidity in times of emergency. Corporate bond funds offer much better returns than other debt securities. Corporate debt securities can expect average yields of 8-10%, while bank FDs will currently only have an average yield of 5-5.5%. A 20% long-term capital gains tax with indexation is available if you invest in corporate bond funds for more than three years. Since DF returns are taxed according to income tax brackets, corporate bonds are a good complement to DF for investors in the highest tax bracket. As a result, you can use corporate bond funds in your debt portfolio, as these funds can generate consistent returns with low risk exposure and substantial after-tax returns.

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