Corporate Bonds also known as non-convertible debentures are debt category mutual funds that lends at-least 80% of their capital to Companies or Corporations with the best Credit Ratings (which are offered by rating agency CRISIL).
Credit risk is low because Corporate bond funds invest in high-rated (AAA) instruments.
Many Companies issues prefers issuing debt instruments to raise money for their operations.
Corporate bond securities are the underlying portfolios of credit opportunities for debt funds. When you purchase a bond, the company is borrowing money from you. The firm will repay the principal after the maturity period as mentioned on the agreement. In the meantime, you will receive the interest (fixed income) – known as the coupon.
Corporate bond funds invest predominantly in debt papers. Companies issue debt papers, which include bonds, debentures, commercial papers, and structured obligations.
Every bond has a price, and it is dynamic. You can buy the same bond at different prices, based on the time you choose to buy. Investors should check how it varies from the par value.
Par Value is the amount the company (bond issuer) pays you when the bond matures. It is the loan principal. In India, a corporate bond’s par value is usually Rs 1,000.
When you buy a bond, the company will payout interest regularly until you exit the corporate bond or the bond matures. This interest is called the coupon, which is a certain percentage of the par value.
The annual returns you make from the bond is called the current yield. For example, if the coupon rate of a bond with Rs 1,000 par value is 20%, then the issuer pays Rs 200 as the interest per year.
If you are holding your corporate bond fund for less than three years, then you must pay short-term capital gains tax (STCG) based on your tax slab. On the other hand, Section 112 of the Indian Income Tax mandates 20% tax on long-term capital gains. This applies to those who hold the bond for more than three years.
Recommended Duration: 1 year at-least
Category Returns: 5% to 10%
Below are best IDCW (Income Distribution cum Capital Withdrawal) Corporate bonds which offers fixed income:
In Summary, Speaking very simply, bonds are loans.
When you buy a bond, you are giving your money as a loan to someone.
That someone is promising to pay back that amount after a certain period of time, along with a fixed interest rate.
When companies need money, they issue bonds to investors. Basically, they are borrowing money from investors.
These bonds are called corporate bonds.
Every company is not the same. Some companies are more reliable. Some are less reliable.
There is a higher chance that a less reliable company may default and not pay back the money it has borrowed.
This is why different bonds have different interest rates. This is also why the risk level of every bond is different.
Corporate bond funds are mutual funds that invest in corporate bonds.
In these mutual funds, a fund manager (who has experience and expertise) analyses bonds.
Based on the fund manager and the team’s analysis, the corporate bond mutual fund invests, holds, or sells different corporate bonds.
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