Corporate Bond Funds

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
AAAHighest SafetyA1Lowest Risk
AAHigh SafetyA2Low Risk
AAdequate SafetyA3Moderate Risk
BBBModerate SafetyA4High Risk
BBModerate RiskDExpected to default
BHigh RiskCRISIL may apply '+' (plus) sign for ratings from 'CRISIL A1' to 'CRISIL A4' to reflect comparative standing within the category.
CVery High Risk
DExpected 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 InvestmentCorporate Bond Fund
Investment 1,00,000 1,00,000
Investment Date01-04-202001-04-2020
Maturity Date31-03-202431-03-2024
Taxation od maturity proceedsIncome Tax Rate20% after indexation
Assumed rate of return6%6%
Investment Tenure (yrs)4.04.0
Number of indexation periodsN/A4
Maturity Amount1,26,2481,26,248
Indexed cost of acquisition N/A1,16,986
Taxable income/capital gains 26,2489,262
Tax 8,1891,926
Post Tax Income 1,18,0581,24,321

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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How risky are corporatebond funds?
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Taxation of Corporate bond funds
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What are corporate bond funds?
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What are credit ratings?
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Placement of corporate bond funds in asset allocation
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Why should you invest in corporate bond funds now?
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Things to look before investing in corporate bond funds

For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint in case of any grievance Click here!

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

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*By Mirae Asset Knowledge Academy

#Tax benefits are subject to the provision of the Income Tax Act, 1961 and are subject to amendments, from time to time.

Tax savings of Rs. 46,800 is calculated assuming qualifying amount of deduction is Rs 1.50 lakh and investor falls in the top income tax slab of 30% and includes applicable cess. Investors are advised to consult his/her own Tax advisor in view of individual nature of tax benefits. Further, tax deduction(s) available u/s 80Cof the Income Tax Act, 1961 is subject to condition specified therein. Investors are requested to note that fiscal laws may change from time to time and there can be no guarantee that the current tax position may continue in the future.

All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, click here

Disclaimer: The calculators are based on assumed rate of returns and meant for illustration purposes only. The calculators are designed to assist you to get a better understanding on how returns would have panned out in various scenarios. This calculator alone is not sufficient and shouldn’t be used for the development or implementation of any investment strategy. In the preparation of the calculator, Mirae Asset Mutual Fund (MAMF) has tied up with Advisorkhoj who have developed and integrated the calculator with our website. The calculator uses information that is publicly available and information developed in-house. Information gathered and material used in this calculator is believed to be from reliable sources. MAMF however does not warrant the accuracy, reasonableness and/or completeness of any such information. The examples do not purport to represent the performance of any security or investments. It is neither an investment advice nor should it be construed as indicative of any of the schemes of Mirae Asset Mutual Fund. Invest as per your risk appetite and time horizon. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax advisor before taking any investment decision. Contact your financial advisor for detailed insight into the investment advice. Mirae Asset Global Investments (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.

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