Leveraging the business using debt financing has been a favored practice. As it is a less expensive source than bank loans and contributes greatly to the growth of a company without much dilution of decision-making powers.
Corporate bond debt funds are a form of mutual funds that invests more than 80 percent of their total financial resources in bonds that are sold to meet businesses short term requirements, in AA+, and above rated corporate bonds. It is essentially a form of debt financing that is backed by the profitability and financial capacity of a company.
The term debt was redefined by SEBI and a moderately safer option called corporate bonds was set up. There are about 16 categories of debt funds listed by SEBI. The time-period for corporate bonds ranging from 1 -3 years and average returns are expected to be around 8 – 10%, which makes it even more appealing than government bonds. Debt finance investors look for less risky options and thereby choose banks or PSU bond funds, over time corporate bonds also have been picking up pace as the two holds high-quality debt papers. The primary difference between the two is the sector investment authorized, that is the first one can only invest in bonds issued by banking or public sector entities and the second one can invest in AA+ rated and above bonds, this is a measure taken to ensure creditworthiness. The Franklin Templeton chapter pointed out the importance of liquidity and how low-rated bonds can affect significantly.
Corporate bond funds have delivered around 8.8 percent returns over the past few years, about 80bps higher than the category average. ICICI Prudential Corporate Bond has been investing over 90 percent in AAA-rated bonds, which lowers the credit risk event at such immense volatile times. And also maintained a maturity period between 1.5 – 3 years, to cap risks associated with the interest rate.
Debt funds offer more security than shares as it holds a financial obligation on the issuing entity. Corporate bonds are operated just like any other mutual fund and hence an increase in the value of a corporate bond in the portfolio increases the net asset value of the fund and generates profits. Conservative investors can always consider corporate bond funds as it poses moderate risks and generates reasonable returns, subject to market risks.
