What Are Corporate Bond Funds? A Beginner’s Guide

If you have been thinking about safer ways to grow your money and are not sure where to begin, corporate bond funds might be worth a look. They are not as popular as fixed deposits or stocks, but they sit somewhere in between. These funds offer the chance to earn better returns than a savings account without taking on too much risk.

Let’s go over what they are, how they work and why more investors in India are starting to include them in their portfolios.

What Are Corporate Bond Funds?

In simple terms, a corporate bond fund is a type of mutual fund. It collects money from many investors and uses it to buy bonds issued by companies. These companies borrow the money for business needs and in return, they agree to pay interest regularly.

You are not lending directly to the companies. Instead, you invest in the fund and the fund manager decides which bonds to buy. The goal is to pick high-quality company bonds that pay interest on time and return the money when the bond matures.

How Do They Work?

SEBI rules say that corporate bond funds must invest at least 80 percent of their money in bonds that are rated AA or above. That means the companies issuing these bonds are considered to be strong and reliable.

The fund manager builds a mix of different bonds from various companies and sectors. As these bonds generate interest, that money goes into the fund. You, as an investor, benefit from this income. You can choose to withdraw the interest as regular payouts or keep it invested so it grows over time.

These funds are open-ended. You can invest or take your money out any time, though it’s better to stay invested for a few years to get good results.

Why People Choose Corporate Bond Funds

Higher Returns Than Fixed Deposits
The interest you earn from these funds is often better than what you get from a bank FD. And because the fund mostly invests in top-rated company bonds, the risk is still moderate.
Easy to Access
You do not need to study every company’s bond offering. A professional fund manager does the work for you, picking the right mix based on market conditions.
Spreads Out Risk
Because the fund holds bonds from several companies, it is not dependent on just one company doing well. This reduces the chance of losing money due to one poor performer.
You Can Exit When You Need To
Unlike fixed deposits, where your money is locked in, you can usually redeem your investment in a bond fund whenever you need it. Some funds may charge a small exit fee if you withdraw early, so always check before investing.
Tax Benefits Over Time
If you hold your investment for more than three years, you may get tax benefits through indexation. This can reduce the total tax you pay on your returns.

Points to Keep in Mind

Market Rates Can Impact Returns
If interest rates in the market go up, bond prices may fall for a while. This can affect your fund’s value in the short term. But if you stay invested longer, the impact usually balances out.

Returns Are Not Guaranteed
Unlike a fixed deposit, the returns from a corporate bond fund are not fixed. They depend on the performance of the bonds inside the fund.

Understand Where Your Money Goes
Even though these funds mostly invest in well-rated bonds, it is still smart to check where your money is being invested. Read the fund’s fact sheet and see the list of companies and their ratings.