All You Need To Know About Corporate Bond Funds

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A corporate bond is an instrument issued by a company to borrow money from an investor by paying interest, while the principal is repaid at maturity. Corporate bond funds are debt funds with a regulatory mandate to invest at least 80% of their capital in companies that have the highest possible credit rating: AAA. Businesses with a high rating are generally financially strong and have a high probability of paying lenders on time. There are a number of instruments that a corporate bond fund invests in.

These can be commercial paper, bonds or debentures. The risk profile and maturity of each component vary by instrument.

What kind of returns did you offer in the past?

According to data from Value Research, the category of corporate bond funds has offered a return of 7.02% in the last year, while in the last three years they have given 7.62%.

How are corporate bond funds taxed?

The funds are taxed as debt funds. According to the Income Tax Law, if the investor keeps the funds for less than three years, they must pay short-term capital gains taxes online with their income tax return with mutual fund tracking for corporate. If they are more than three years old, they are taxed at 20%, with indexing.

Who should invest in a corporate bond fund?

Financial planners believe that if you have a three to five year time horizon and don't want to take a high risk on your debt portfolio, you can opt for corporate mutual fund. While there is interest rate risk in such a fund, they carry low credit risk. As the portfolio has AAA-rated paper from companies with solid finances. These highly rated companies are more trustworthy than companies with lower ratings. However, a higher rating does not mean that the company's ratings will not go down in the future or that they cannot breach. Corporate bond funds are less volatile than credit default funds, long-term debt schemes and gilt schemes, mutual fund advisers say.

Posted 05 May 2022

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