When it comes to debt funds, there’s a wide variety of options to choose from. One of the less common but highly rewarding debt funds is corporate bond funds. Before deciding to make an investment, consider learning a few things about these funds.
Fixed deposits make a safe option for short-term financial goals, but such investments don’t provide inflation-beating returns. With inflation expected to go to 6.3%, fixed deposit rates are no match for it. If you are a conservative investor looking to grow your money, then debt funds should be on your radar.
Corporate bonds can be a good investment to look to because these are fixed income instruments that companies issue to raise funds. If you invest in top-rated corporate bonds, you are likely to make reasonably high returns while keeping your money safe.
What are corporate bond funds?
Corporate bond funds are mutual funds that invest a majority of their money in corporate bonds. Corporate bonds are rated by assessing the degree of risk associated with these bonds. Any bond that is rated in the investment-grade is considered safer compared to bonds that are junk-rated. While junk-rated bonds may promise higher returns, the risk associated with these bonds is also higher. Investing in corporate bond funds that choose top-rated investment-grade bonds is more likely to provide you with assured and stable returns. Should you invest in corporate bond funds? Investing in corporate bond funds comes down to your financial goals and risk profile.
If you are an investor with a low-risk profile seeking to make slightly higher returns than fixed deposits or government bond funds, then corporate bond funds can serve that purpose. These are relatively a low-risk option if you invest in funds that choose highly-rated corporate bonds. If you want to assume a higher risk for better returns, then funds that invest in junk bonds or low-rated corporate bonds can be a good option. However, do note that the default risk with these instruments is high. There may be a higher return potential, but the risk is also higher. It is ideal for you to stay invested in a corporate bond fund for between three to five years for the best returns. Risks to consider Compared to fixed deposits or government bonds, corporate bonds carry a higher risk. While you can mitigate this risk by investing in funds that choose only top-quality bonds, the risk is still higher than other debt mutual funds or government bond funds. Aspects to consider before investing in corporate bond funds
• Corporate bond funds invest in company bonds and debentures of varying maturities. Choose a fund that has an average maturity period of your investment horizon.
• It is essential to have some market knowledge on bonds and debentures to invest in corporate bond funds. Make sure to do your homework.
• If you want rewarding returns at low risk from your investment, choose funds that invest in top-rated corporate bonds and debentures only.