Corporate bond funds are debt funds that lend at least 80% of their money to companies with the highest possible credit rating. This rating is given only to companies that are financially strong and have a high probability of paying lenders on time.
- Ideal for the money you don't need for 2-3 years.
- Funds in this category tend to deliver better returns than Bank Fixed Deposits of similar duration.
- Holding them for 3 or more years will give you tax-efficient returns as they qualify for indexation benefits.
Advantages of Corporate Bonds
One major draw of corporate bonds is their strong returns. Yields on some government bonds have repeatedly plunged to new record lows. The U.S. government sold $12 billion worth of 30-year Treasury bonds for a 2.172% yield on July 13, 2016, breaking the previous record of 2.43% set in January 2015. As of 2018, the corporate bond yield had reached as high as 4.02%.
LquidityMany corporate bonds trade in the secondary market, which permits investors to buy and sell these securities after they have been issued. By doing so, investors can potentially benefit from selling bonds that have risen in price or buying bonds after a price decline.
Some corporate bonds are thinly traded. Market participants looking to sell these securities should also know that numerous variables could affect their transactions, including interest rates, the credit rating of their bonds, and the size of their position.
Widespread OptionsThere are many types of corporate bonds, such as short-term bonds with maturities of five years or less, medium-term bonds that mature in five to 12 years and long-term bonds that mature in more than 12 years.
Beyond maturity considerations, corporate bonds may offer many different coupon structures. Bonds that have a zero-coupon rate do not make any interest payments. Instead, governments, government agencies, and companies issue bonds with zero-coupon rates at a discount to their par value. Bonds with a fixed coupon rate pay the same interest rate until they reach maturity, usually on an annual or semiannual basis.