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Corporate Bond funds are debt mutual fund schemes which invest at least 80% of its assets in high rated corporate bonds which can offer high safety.

These funds primarily invest in AA+ and above rated corporate bonds or non- convertible debentures. Since these funds invest in the high rated debt securities, credit risk is low, but these funds may be subject to interest rate risks depending on their duration profiles. Usually, corporate bond funds have moderate interest rate risk.

Why invest in Corporate Bond funds?


Advantages

High Credit Quality : Invest minimum of 80% in AA+ and above rated corporate bonds.

High Liquidity : AAA and AA+ remain as most traded and highly liquid segment

Better Risk Adjusted Returns : Potential to provide Better Risk Adjusted returns compared to other debt categories


Credit Rating

Credit rating agencies evaluate credit risk of debt and money market instruments and assign credit ratings. The table below describes the credit rating scale used by rating agencies to rate fixed income securities.

Long term Instruments (Maturity > 1 year) Short Term Instruments Maturity < 1 year)
Rating Risk Rating Risk
AAA Highest Safety A1 Lowest Risk
AA High Safety A2 Low Risk
A Adequate Safety A3 Moderate Risk
BBB Moderate Safety A4 High Risk
BB Moderate Risk D Expected to default
B High Risk CRISIL may apply '+' (plus) sign for ratings from 'CRISIL A1' to 'CRISIL A4' to reflect comparative standing within the category.
C Very High Risk
D Expected to default

Source: CRISIL

Credit ratings can change during the maturity term of an instrument, e.g. an AA rated paper may get downgraded to A or BBB, a BBB rated paper can get upgraded to A etc. Lower the credit rating of a debt instrument, higher is the risk of it getting downgraded or defaulted.


Tax Benefit

Investing in Corporate Bond Funds for a period exceeding three years qualifies for long-term capital gains tax at 20% with indexation. This makes corporate bonds a good alternative to FDs for investors belonging to the highest tax bracket, as FD returns are taxed as per income tax slabs.

Traditional Investment Corporate Bond Fund
Investment 1,00,000 1,00,000
Investment Date 01-04-2020 01-04-2020
Maturity Date 31-03-2024 31-03-2024
Taxation od maturity proceeds Income Tax Rate 20% after indexation
Assumed rate of return 6% 6%
Investment Tenure (yrs) 4.0 4.0
Number of indexation periods N/A 4
Maturity Amount 1,26,248 1,26,248
Indexed cost of acquisition N/A 1,16,986
Taxable income/capital gains 26,248 9,262
Tax 8,189 1,926
Post Tax Income 1,18,058 1,24,321

Source: Advisorkhoj

Credit risk and Yields

Lower rated debt instruments give higher yields than higher rated instruments, but higher yields come with higher credit risks.

Some fund managers may want to increase the yield of the fund, thereby giving higher returns to investors, by investing a portion of their assets in lower rated instruments. Investors should understand the risks of a fund and make informed investment decisions.


Who should invest in Corporate Bond funds?


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The information contained in this document is compiled from third party and publically available sources and is included for general information purposes only. There can be no assurance and guarantee on the yields. Views expressed by the Fund Manager cannot be construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Mirae Asset Investment Managers (India) Private Limited (the AMC) shall have no responsibility/liability whatsoever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts no liability for any loss or damage of any kind resulting out of the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such information shall be done only after consultation to the financial consultant to understand the specific legal, tax or financial implications. Investors are advised to read the Scheme Information Document of the respective scheme to know in detail about the product before investing.

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