• 4th December 2020

Why Consider Investing in Corporate Debt Funds?

Mutual funds are a pool of professionally managed funds that invest across various money market instruments and offer diversification by investing in asset classes and fixed income securities. Mutual funds offer active risk management where the fund manager forms an investment strategy to buy and sell securities in quantum with the investment objective and its underlying benchmark. Fund managers are allowed to take risk depending on the nature of the scheme and the tenure in which it aims at generating capital appreciation. 

Market regulator SEBI (Securities and Exchange Board of India) describes mutual funds as –

a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced

There is a common misconception among some investors who believe that mutual funds are only of one category and this equity. What they do not know is that SEBI has ordered categorization of mutual funds based on the scheme’s unique characteristics like asset allocation strategy, risk profile, investment objective, etc. Some of the major mutual fund categories apart from equity include solution oriented schemes, debt schemes, hybrid schemes, ETF, gold, index funds etc.
What are corporate bond funds?

Corporate bond funds are a debt fund category funds ideal for those who are shifting from traditional investment avenues to market linked schemes or for those who carry a moderate risk appetite. That’s because a corporate bond fund allocates at least 80 percent of its total assets in AAA and AA+ rated bonds.

Why should you consider investing in corporate bond funds?

If you are looking for reasons to add corporate bond funds to your mutual fund portfolio, here are a few that might suffice the purpose:

These funds invest in high rated company bonds

The reason corporate bond funds are quite familiar among investors is because they predominantly invest in AAA and AA+ rated bonds. An aggressive mutual fund investor looking to add some cushion to his / her portfolio can consider investing in corporate bond funds. It is less likely for all the asset classes to perform in tandem at the same time. In case your equity portfolio is underperforms in volatile markets, corporate debt funds can provide the required cushion in failing markets. 

Corporate bond funds offer SIP investment option
If you wish to build a corpus and wish to invest regularly in corporate debt funds, you may consider opting for SIP. Systematic Investment Plan or SIP is a systematic approach where one can pay their mutual fund investment amounts at regular investments in an easy and hassle free manner. All an individual needs to do is instruct his / her bank, and every month a fixed amount shall be debited and transferred to the corporate debt fund account. SIP investments tend to benefit from power of compounding. Compounding in mutual funds is nothing but the interest earned on interests and profits earned on profits. Over a period of time, a small SIP amount stands a chance of turning into a large corpus. Investors are free to stop their SIP investments midway.
Ideal for short term goals

If you have surplus cash for a short period which is sitting ideal but is going to be utilized in a short span of time, you can invest this amount in a corporate debt fund. Corporate debt funds are ideal to target one’s short term financial goals like making the down payment of that luxury car you always wanted, planning a short vacation, renovation of your home, deposit for you newly rented house etc. 

Although corporate debt funds are less volatile as compared to equity funds, they do not offer guaranteed returns. Do consult a financial advisor if you need further assistance in making an investment decision.

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