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The 19 Most Important Steps to Solving Corporate Bonds

by mohsinbeg

Corporate Bond Funds: Risks, Returns , and Suitability

You should be aware that mutual funds don’t invest only in equity however they also invest in loans. Investors should choose only those mutual funds that match with their risk profiles. This article provides information about corporate bond funds – which is a class of debt fund schemes.

Corporate Bond Fund Debt

Any business is able to issue corporate bonds, often called NCFs, also known as (NCDs). Companies or organizations require money to finance their daily business operations as well as potential expansions and opportunities for growth. To do this, businesses can use two methods – either through equity or debt instruments. Debt is a safer option because it does not affect the shareholders directly. Hence, most companies prefer borrowing from debt instruments in order to raise capital for their operations. In accordance with their needs bank loans can be expensive for companies. This is why bonds and debentures can provide businesses with an affordable option to raise funds. Corporate bond securities are the underlying portfolios of credit possibilities for debt funds. When you purchase an obligation, the business will borrow money from you. The company will repay it’s principal once it has reached the maturity period stipulated on the contract. In the meantime you’ll be receiving payment of the interest (fixed income) or the coupon. Typically, coupon payments in India are distributed twice in a year.

Who is the best person to invest in corporate bonds?

Corporate bonds are an excellent choice for investors looking to earn a fixed but higher income from a safe option. Corporate bonds are a safe alternative to debt funds because they offer capital security. However, these bonds aren’t completely safe. If you choose corporatist bond funds investing in top-quality debt instruments, it will help you achieve your financial objectives better. The long-term debt funds tend to become riskier when interest rates fluctuate beyond expectations. As a result, corporate bond funds make investments in scrips to reduce fluctuation. They typically follow an investment period of one calendar year or more to four. This could be an added benefit to investing for three or more years. It may also be more tax-efficient if you have the highest income tax slab.

Go to: Online mutual fund investment portal

Features & benefits of Corporate Bond Funds


Components of corporate bonds

Corporate bond funds invest predominantly in debt papers. Businesses issue debt documents, which include bonds and commercial papers and structured obligations. Each one of these items has an individual risk profile and the date at which they mature differs.


Price of the bond

Each bond has a cost that is variable. It is possible to purchase the same bond for different prices based on the time you choose to buy. Investors must be aware of how the rate varies from the par value , as it will provide information on the direction of the market.


Par Valuation of bond

That is the sum that the corporation (bond issuer) will pay you once the bond matures. This is the principal amount of the loan. In India corporate bonds, the par value is usually at least Rs. 1,000.


Coupon (interest)

If you purchase a bond, the company pays interest monthly until you exit the corporate bond or when the bond is mature. This is referred to as the coupon that is a specific percentage in the value.


Today Yield

The annual amount you earn from your bond is known as”the present yield. As an example, if coupon rate for one bond of Rs.1,000 worth of par is 20 percent, then the issuer has to pay 200 as interest per year.


Yield until Maturity (YTM)

This is the rate in-house of return for all cash-flows from the bond including the current bond rate, the coupon payments until completion and the principal. More the YTM, higher will be the returns. The reverse is also true.


Tax-efficiency

If you are holding the corporate bond funds for less than 3 years, you will need to be liable for short-term capital gain tax (STCG) determined by your tax slab. However, Section 112 of the Indian Income Tax mandates 20 per cent tax on long-term capital gains. This is applicable to those who hold the bond for more than three years.


Exposure & allocation

Corporate bond funds can, in some cases will take small exposures to government securities , too. But , they only do this whenever suitable opportunities in the credit market are available. In the average corporate bond funds have approximately 5.22 percent of their allotted to fixed income of sovereigns.

Risk factors & returns

There’s always a chance of bond issuers not meeting their obligations. This default risk is higher for securities with lower ratings, and will go up exponentially with increasing maturities. If your fund manager invests in highly rated companies, expect an average return within the range of 8%-10 percent. The risk here is also minimal. However If you invest in a slightly low-rated but managed well, then it might be profitable. For instance, companies tend to provide slightly more attractive coupon rates in order to draw investors. However, there is also an opportunity an investment manager’s decision regarding a company’s performance is not the best. In the event that a company is in default on interest payments or principal repayments or gets further downgraded, it’s a setback for investors.

How do corporate bonds make returns?

The market for debt is where a range of bonds are traded. It is a market where prices of bonds vary and can either rise or fall, as they do in the markets for stocks. For instance the mutual fund purchases an obligation, and its price rises. In the end, it could earn extra money in addition to the amount it could have earned by generating interest on its own. However, it could reverse the process.

Types of corporate bond funds

Broadlyspeaking, there are two types of corporate bond funds.

  • Type one:Type one Corporate Bonds can be used to invest in high-rated firms – the public sector unit (PSU) companies and banks.
  • Type 2:Type two corporate bonds put money into slightly lower-rated companies like ‘AA- at least’ and lower. Let’s consider a very simple scenario to understand this. Suppose, it is a CRISIL “A” rating bond with a 1-year residual maturity is a 0.56 percent chance of default and the CRISIL “A” rating bond with a residual of 3 years maturity has an 4.79 percent chance of failing. The majority of corporate bond funds dedicate the majority of their portfolio to bonds that have AA ranks or lower. Thus, there’s always a possibility of one or the other bonds in the portfolio becoming insolvent which could result in a reduction of returns to the portfolio.

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