There are various ways in which companies can get finance for expansion and growth. One of the ways is corporate bonds. Corporate bonds are one type of loan that companies take from investors. They return the funds after maturity and pay fixed interest.
Those mutual funds that invest a major portion of their funds in corporate bonds are defined as corporate bond mutual funds. In this article, we will understand why corporate bond funds are so beneficial for your portfolio.
Table of Contents
What are Corporate Bond Funds?
Corporate bond funds are those mutual funds that invest more than 80% of their money in corporate bonds. These bonds are debt instruments which pay you fixed interest and return a principal amount along with interest at maturity.
Corporate bond funds are good investment options for those investors who need regular income and want capital appreciation. They are one of the best debt mutual funds as they are more secure and less risky.
Types of Corporate Bonds Funds
There are various types of corporate bond funds which are as under: –
- Short-term Corporate Bond Funds
These are those funds that invest in corporate bonds that have a maturity tenure of 1-3 years. They are less risky but are less rewarding as compared to long-term corporate funds. They are good for investors willing to invest for short tenure.
- Medium-term Corporate Bond Funds
These are those funds that invest in corporate bonds that have a maturity of 3-7 years. They carry moderate risk and offer moderate returns. They are good for investors who have medium-term tenure.
- Long-term Corporate Bond Funds
These funds invest in corporate bonds that have a maturity of more than 7 years. They offer higher gains as compared to bank FDs and government securities. They are best for those who have a long tenure and want to have higher returns.
Why Corporate Bond Funds are Good for Portfolios?
Corporate bond funds offer unique benefits which make it good for your portfolio. Here are some of the main benefits of corporate bond funds: –
- Higher Returns
Corporate bond funds offer higher returns as compared to bank deposits, government securities and other debt instruments. Average returns can be around 8-10% which is quite good.
- Liquidity
Corporate bond funds are for fulfilling the short-term financing requirements of the business. Hence, they are for a short duration only. In addition to this, there is no restriction on the sale of corporate bond funds. You can sell it as per your wish.
- Low Risk
Corporate bond funds generally invest in high-rated bonds. Hence the risk involved is very low.
- Security
Corporate bond funds are one type of obligation to the company and hence they are less risky as compared to equity instruments. On the other hand, equity instruments are quite risky as they are based on a company’s performance and market fluctuations.
- Diversity
There are different types of corporate bond funds based on the tenure of investment. You invest in one that suits your financial goal.
Conclusion
Corporate bond funds are good investment options as they offer higher returns and liquidity as well as carry low risk. They are available in different tenure options so one can invest as per one’s financial goals. Corporate bond funds are more secure as compared to equity instruments. Hence, they are good for risk-averse investors. To invest in mutual funds with ease, consider Dhan.
