A Corporate Bond Fund invests at least 80% in highest-rated corporate bonds (AA+ and above) — offering better yields than government securities with very low credit risk.
Corporate bond funds focus on highly rated (AA+ and above) bonds issued by corporations, financial institutions, and public sector companies. SEBI mandates ≥80% in the highest-rated instruments. These funds offer a yield premium over government securities (g-secs) because they carry slightly more credit risk than government paper. The portfolio duration can vary — fund managers choose where on the yield curve to position based on rate outlook.
When companies need long-term money, they issue bonds (IOUs). A corporate bond fund lends your money to the best-rated companies — like HDFC, Reliance Industries, Axis Bank — and earns interest. Since these companies are highly rated (AA+), the risk of default is low. Returns are slightly higher than government bonds because lending to a company (even a great one) carries slightly more risk than lending to the government.
≥80% in AA+ or AAA-rated corporate bonds.
Remaining 20% at fund manager's discretion — may hold g-secs or slightly lower-rated bonds.
Duration flexible — fund manager may extend duration when rates are expected to fall.
Credit spread compression (AAA-corporate yield falling toward g-sec yield) can boost returns.