Introduction to Corporate Mutual Funds

1. Introduction to Corporate Mutual Funds

2. You need to understand that mutual funds not only invest in stocks, but also in debt instruments. Investors should choose only those mutual funds that are in sync with their risk profile. This article provides information on corporate bond funds, a category of debt fund schemes.

3. Corporate bond debt funds • Any company can issue corporate bonds, also called non-convertible bonds (NCD). Organizations or businesses need capital for their day-to-day operations, as well as for future expansion and growth opportunities. To achieve this, companies have two ways: debt and equity instruments. Debt is a safer option since it does not directly affect the shareholders of the company. Therefore, most companies prefer to issue debt instruments to obtain capital for their operation. Depending on your needs, bank loans can be expensive for corporations. This is where bonds or debentures provide companies with an inexpensive alternative to raise funds. Corporate bond securities are the underlying portfolios of credit opportunities for debt funds. When you buy a bond, the company borrows money from you. The company will repay the principal after the expiration period mentioned in the agreement. Meanwhile, you will receive the interest (fixed income), known as a coupon. Generally coupon payments in India are made twice a year.

4. Who should invest in corporate bonds? • Corporate bonds are an excellent option for institutional investors looking for a fixed but higher income from a safe option. Corporate bonds are a low-risk investment vehicle compared to debt funds, as they guarantee capital protection. However, these bonds are not entirely safe. If you opt for corporate bond funds that invest in high-quality debt instruments, then it may better serve your financial goals. Long-term debt funds often tend to be riskier when interest rates fluctuate beyond expectations. As a result, corporate bond funds invest in scrips to combat volatility. They usually have an investment horizon of one to four years. This can be an added benefit if it stays invested for up to three years. It can also be more tax efficient if you're at the top of your income tax.

5. How do corporate bonds return? • There is a debt market where various bonds are traded. In this market, the prices of different bonds can go up or down, as in the stock markets. For example, online mutual fund investment portal buys a bond and its price subsequently increases. So you can earn additional money on top of what you would have earned from interest income alone. However, it could also be the other way around.

6. Things to Remember Before Investing in Corporate Bond Funds • Corporate bond funds invest in medium to long-term corporate bonds and bonds. So consider it a long-term investment vehicle. • A little knowledge of the market is essential here. If you are not an experienced investor in debt funds, it will be difficult to understand the potential risks and the market. • Remember that a large number of defaults within a fund's portfolio can cause a serious drag on performance. If you decide to invest in them, don't let last year's returns influence your decision • For corporate investing service, it's best to stick with the big AMC offerings, preferably the top five funds. If not, new investors would be better off sticking with higher-rated, lower-credit-risk short-term debt funds.

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