In October 2020, data from the Association of Mutual Funds showed that debt schemes and corporate bond funds clocked the biggest inflows in more than a year. Experts attributed that the ripples caused by the COVID-19 pandemic to financial markets led many investors to gravitate towards less risky avenues of investments.

Corporate bond funds are typically debt funds that lend at least 80% of their money to companies with the highest possible credit rating. This rating is conferred to only those companies that have strong financial credentials and have a high probability of paying lenders on time.

Firms raise capital from the investors at a certain rate of interest with the assurance that the money would be repaid over a period of time. Until the bond matures, bond holders receive a pre-determined number of interest payments and on maturity they usually also get back the original investment. The bond holder receives a pre-determined number of interest payments till the maturity of the bond, at which time the original investment is returned. If you are looking for an investment vehicle that offers capital protection without compromising on the return of the liquidity factor, corporate bond funds may be a great investment choice. However, it is always suggested to consult a financial advisor before investing.

Liquidity and variety

Should you be in urgent need of capital, you need not wait until your corporate bond investment matures. Corporate bonds can be easily traded thanks to the vastness of the market. What’s more, these bonds come in short, medium and long-term variants with distinctions in credit ratings that afford flexibility to investors who can choose funds that align with their investment patterns, risks and goals.

Returns

Returns offered by corporate bond funds vary in accordance with the risk rating of the fund's portfolio. Should you may invest in the highest-rated bonds, you may get probable returns and seek a higher degree of immunity to market volatility than equity funds. Funds invested in slightly lower-rated bonds may also generate potential returns but they may also carry a higher default-risk. Corporate bonds also offer probable returns than government bonds because the former carries greater risk and thus offers greater potential for capital appreciation.

Security

Corporate debt funds have a lower risk factor than equities, as it is a binding obligation for companies to pay back the investors. The performance of equity investments is significantly influenced by the performance of the company in certain time frame. They are subject to the profits and losses generated by a company in one financial year, and thus, are relatively riskier. This makes corporate debt funds a suitable investment option for conservative investors seeking capital appreciation in a medium to long term horizon.

Making an informed choice

The highest-rated corporate bonds carry significantly lesser risk than bonds that carry a lower rating. The credit ratings of companies (including past ratings) are easily available on public domains and this can help you get a clear picture of a particular company’s performance and how liable it is to pay back those to whom it has issued bonds. Thus, it becomes easier to gauge the risk that an investment in a corporate bind would entail.

If you are looking for options to diversify your portfolio without pushing yourself into a high-risk terrain that doesn’t align with your appetite, corporate bonds may be a great addition – it can offer higher yields than government bonds and you can choose a fund that matches your risk profile.

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