3 Best Corporate Bond Funds for 2024

December 7, 2023 Mutual Fund

Debt as an asset class plays an important role in one’s portfolio. Although you may be a risk-taker or an aggressive investor, it makes sense to allocate a small suitable portion to debt instruments from a portfolio diversification standpoint. In this regard, debt mutual funds are a worthwhile choice as they offer diversification across types of debt & money market securities and can earn you relatively stable market-linked returns (compared to equities).

As an investor, if you are looking to have exposure to corporate bonds, then some of the best Corporate Bond Funds can be a meaningful choice from a 2 to 3 years investment horizon.

In this article, I’ll elucidate which are the 3 Best Corporate Bond Funds for 2024, but before that, let’s understand some basics.

This article includes

• What Are Corporate Bond Funds

• What is the Investment Objective of a Corporate Bond Fund

• How Safe Are Corporate Bond Funds

• How to Choose the Best Corporate Bond Funds to Invest in

• Which Are the Best Corporate Bond Funds for 2024

• Who Should Invest in Corporate Bond Funds

• The Tax Implications of Investing in Corporate Bond Funds

What Are Corporate Bond Funds?

This sub-category of debt mutual funds is mandated to invest a minimum of 80% of their assets in the highest-rated corporate bond instruments. Corporate Bond Funds predominantly invest in AA+ and above-rated corporate debt securities.

There is no limit or restriction on the maturity profile of corporate bonds, but typically, they are in the range of 2 to 3 years. The fund manager of a Corporate Bond Fund considers a host of macroeconomic factors, particularly interest rates and yields, for the portfolio duration.

That said, Corporate Bond Funds have moderate sensitivity to interest rate changes. An uncertain and rising interest rate scenario could make them vulnerable to fluctuations. But when interest rates are stable or falling, they stand to potentially benefit.

In times when we seem to be near the peak of the current interest rate upward cycle, Corporate Bond Funds are conceivably a sensible choice for your portfolio.

But it would be best to stick with Corporate Bond Funds that hold AA+ and above-rated corporate debt securities (prefer safety), some sovereign-rated Government securities (G-secs), and money market instruments rather than the ones engaging in yield hunting to generate exceptionally high returns.

What Is the Investment Objective of Corporate Bond Funds?

Broadly, the primary investment objective of Corporate Bond Funds is to generate optimal returns with high liquidity through active management of the portfolio by investing in High-Quality Debt (AA+ and above rate corporate bonds), debt securities issued by central and state governments, and Money Market Instruments.

However, there is no assurance or guarantee that the investment objective will be realised.

Are Corporate Bond Funds Safe?

Well, there would be some level of credit risk and interest rate risk depending on the underlying portfolio of Corporate Bond Funds. Hence, they cannot be considered safe or risk-free (like in the case of an FD with a robust bank).

Graph: Risk-Return Spectrum of Debt Mutual Funds

For illustration purposes only
(Source: PersonalFN Research) 

As seen in the graph above, on the risk-return spectrum of debt mutual fund schemes, Corporate Bond Funds are placed somewhere between short-duration funds and Credit Risk Funds. Given that there have been instances such as the IL&FS episode and defaults on bonds by DHFL, Yes Bank, Reliance ADAG Group companies, and many others, you need to be very careful when choosing Corporate Bond Funds to invest in.

How to Choose the Best Corporate Bond Funds to Invest in?

You need to look further than the past returns, as they are in no way indicative of how the scheme will perform in the future. Similarly, you can’t base the decision looking at mutual star ratings because they aren’t foolproof.

[Read: Relying on Star Ratings to Pick Best Mutual Funds? Read This]

You need to evaluate a variety of quantitative and qualitative factors, such as…

• The portfolio characteristics (who are the issuers, the sector they belong to, the type of debt papers held, the ratings of the respective debt papers, etc.)
• The maturity profile of the fund (the average maturity, Yield-To-Maturity (YTM), and the Modified Duration (MD) of the portfolio)
• The risk ratios (Standard Deviation, Sharpe Ratio, Sortino Ratio, etc.) to understand if the scheme is adequately compensating on a risk-adjusted basis
• The performance across interest rate cycles
• The credentials of the fund manager and his team
• The AUM and expense ratio of the scheme

In addition, it would do well to understand the investment ideologies, processes, and systems. A mutual fund house must have robust risk management in place and not depend excessively on ratings assigned by credit rating agencies.

In the endeavour to achieve its investment objective, if the Corporate Bond Fund under consideration chases yields and compromises on the credit quality of the portfolio, thereby jeopardising the liquidity of the portfolio, you should stay away from such funds.

Which Are the Best Corporate Bond Funds for 2024?

Considering the facets discussed above, the three best Corporate Bond Funds currently for 2024 are:

1) ICICI Prudential Corporate Bond Fund

2) Axis Corporate Debt Fund

3) Aditya Birla SL Corporate Bond Fund

These schemes hold quality portfolio characteristics with an average maturity profile of 2 to 3 years.

Table 1: Performance of Corporate Bond Funds

Performance as of December 1, 2023. Returns are point-to-point and in %, calculated using the Direct Plan-Growth option.
Standard Deviation indicates Total Risk and Sharpe Ratio measures the Risk-Adjusted Return. The Sortino Ratio indicates the ability of the schemes to limit the downside risk, as it considers the downside deviation.
All ratios are calculated over 2 years assuming a risk-free rate of 5% p.a.
Past performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT recommendations as such.
Speak to your investment advisor for further assistance before investing.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.
(Source: ACE MF, PersonalFN Research) 

Here are some other details as to why ICICI Pru Corporate Bond Fund, Axis Corporate Debt Fund, and Aditya Birla SL Corporate Fund are among the best in the Corporate Bond Funds category…

Best Corporate Bond Fund for 2024 #1: ICICI Prudential Corporate Bond Fund

Launched in August 2009, ICICI Pru Corporate Bond Fund (IPCBF) has a performance track record of over 14 years. During its early years, the fund was predominantly positioned as an ultra-short-term plan, with a strong emphasis on maintaining a portfolio of shorter maturity instruments. However, after SEBI mutual fund categorisation and rationalisation norms, IPCBF was reclassified as a Corporate Bond Fund.

The primary objective of IPCBF is to invest largely in AA+ and above-rated corporate bonds while ensuring an ideal balance of yield, safety, and liquidity.

In line with this objective, the fund holds its underlying portfolio. As regards the rating profile, IPCBF mainly holds AAA and equivalents (around 69.0% of its net asset as per October 2023 portfolio), sovereigns (27.3% of its net assets as per October 2023 portfolio), 0.1% in Pass-Through Certificates (PTCs) issued by banks and securitised debt, and the rest is in cash-and-cash equivalents to manage the liquidity needs.

The fund managers of IPCBF resist investing in low-rated or unrated securities. Only in the past month, IPCBF added an Alternative Investment Fund (AIF), namely the Corporate Debt Market Development Fund, which currently comprises 0.2% of its portfolio.

The fund holds an average maturity of around 2 to 3 years (currently, it is 3.76 years) and holds a well-diversified portfolio of debt securities.

Table 2: Top-10 Holdings of ICICI Pru Corporate Bond Fund

Data as of October 31, 2023
(Source: ACE MF, PersonalFN Research) 

As per the portfolio as of October 2023, IPCBF has 151 securities in its portfolio. The top 10 holdings account for 39.2% of the fund’s assets.

Overall, IPCBF is well-managed and has delivered a CAGR of nearly 7% since its inception. On 2 years, 3 years, and 5 years returns (as seen in Table 1), IPCBF with a prudent approach to credit risk evaluation has demonstrated a decent performance track record noticeably better than the Crisil Composite Bond Fund Index.

While clocking returns, IPCBF has exposed its investors to a fair level of volatility (Standard Deviation of 1.09, lower than the category average). The fund’s Sharpe Ratio of 0.25 and Sortino Ratio of 0.40 outshine many of its prominent peers. Thus, the fund has rewarded investors with commendable risk-adjusted returns, adequately compensating its investors against the risks (interest rate and credit risk). As of December 1, 2023, IPCBF has a YTM of 7.9%. However, this may change as the fund manager buys and sells debt securities in the portfolio.

ICICI Pru Corporate Bond Fund is managed by Mr Anuj Tagra (since March 2020) and Mr Rohit Lakhotia (since June 2023).

Anuj is the Fund Manager – Fixed Income at ICICI Prudential Asset Management Company (AMC) Ltd. and has been associated with the fund house since February 2013. Anuj has around 13 years of experience in Indian debt markets. Before joining ICICI Prudential AMC, he was associated with Union Bank of India and Fidelity Investments. He holds an MBA (Capital Markets) from Narsee Monjee Institute of Management Studies.

Rohit is also a fixed-income fund manager at ICICI Prudential AMC. He joined the fund house in May 2016 and before that was associated with Yes Bank. His overall experience spans over a decade. He holds a Bachelor of Technology (Honors) degree in Electrical Engineering from NIT Rourkela and is a Chartered Financial Analyst (CFA).

Best Corporate Bond Fund for 2024 #2: Axis Corporate Debt Fund

Launched in July 2017, in over six years, so far has displayed a respectable performance track record. Seeking to provide steady income and capital appreciation to its investors by investing in high-quality corporate debt instruments, Axis Corporate Debt Fund (ACDF) looks for debt securities for its portfolio that have the potential to offer superior yield at lower levels of credit risk.

In line with this objective, ACDF invests a predominant portion into corporate debt (63.9% of its net assets as per October 2023 portfolio), G-sec (25.5% of its net asset as per October 2023 portfolio), floating rate instruments (1.4% of its net asset as per October 2023 portfolio) and holds cash-and-cash equivalents to manage its liquidity requirements. The exposure to debt papers of private issuers, viz. Certificate of Deposits (CDs), Commercial Papers (CPs), and PTCs is not more than 5-6% of its net assets. ACDF’s exposure to AIF (namely, Corporate Debt Market Development Fund) is a mere 0.2% of its net assets, which it added in the past month.

Moreover, the rating profile of the debt securities held is respectable: AAA and equivalents and sovereigns.

As regards the maturity profile, a predominant portion of the net assets of ACDF are held in 2 to 3 years and 3 to 5 years maturity buckets. Having said that, while following an active strategy, the fund invests across short and medium-term maturities to take advantage of any changes in interest rates.

ACDF holds a well-diversified portfolio, with the current average maturity being around 3.63 years. This makes the fund moderately sensitive to interest rate changes.

Table 3: Top-10 Holdings of Axis Corporate Debt Fund

Data as of October 31, 2023
(Source: ACE MF, PersonalFN Research) 

As per the October 2023 portfolio, ACDF is holding around 120 debt securities. The top 10 securities comprise 31.3% of the fund’s portfolio.

With exposure to top-rated corporate debt instruments issued by both private and public entities, ACDF has delivered respectable returns for its investors. The fund’s performance is influenced by the coupons and maturity of the portfolio holdings, along with the credibility of the issuers it holds in the portfolio.

Since its inception, the fund has delivered a CAGR of 7.3%. In 2 years, 3 years, and 5 years returns as well, ACDF, by having a prudent approach to credit risk evaluation, has demonstrated a decent track record noticeably better than the Crisil Composite Bond Fund Index (as seen in Table 1). As of December 1, 2023, ACDF’s YTM is 7.7%, but this may change as the fund manager buys and sells debt securities in the portfolio.

ACDF has managed risk well to generate returns. Its Standard Deviation (SD) at 1.21 is lower than the category peers, plus the Sharpe Ratio of 0.16 and Sortino Ratio of 0.27 are noticeably higher (among the best in the category). In other words, the fund has rewarded investors well for the risk taken.

Axis Corporate Debt Fund is managed by Mr Devang Shah (since July 2017) and Mr Hardik Shah (since February 2022).

Devang is the Co-Head of Fixed Income at Axis Mutual Fund and holds over 19 years of experience in the financial services and capital markets, of which over 11 years are in Axis Mutual Fund. He is a Chartered Accountant (CA) and Bachelor’s in Commerce.

Hardik has over 14 years of experience in managing fixed-income securities. He holds a BE (Information Technology) degree and an MBA (Finance).

Best Corporate Bond Fund for 2024 #3: Aditya Birla SL Corporate Bond Fund

Aditya Birla SL Corporate Bond Fund (ABCBF) has a long and distinguished history, dating back to its inception in March 1997. With over 25 years of experience, it ranks as one of the oldest schemes in the corporate bond fund category. Before SEBI’s mutual fund categorisation and rationalisation norms, ABCBF was classified as a short-term debt fund.

As per its new mandate, ABCBF invests at least 80% of its assets should be invested in the highest-rated corporate bond instruments (i.e., AA+ & above). Thus, the fund aims to generate optimal returns with high liquidity through active portfolio management by investing in high-quality debt and money market instruments that have the potential to offer superior yield at lower levels of credit risk.

As far as the maturity profile of the debt instruments is concerned, ABCBF mainly focuses on investing in short-term maturity debt papers of both public and private issuers. This lowers the interest rate risk to an extent and helps ABCBF pursue its strategy effectively. The fund manager makes a judgement about taking duration calls based on a variety of macroeconomic factors.

Table 4: Top-10 Holdings of Aditya Birla SL Corporate Bond Fund

Data as of October 31, 2023
(Source: ACE MF, PersonalFN Research) 

ABCBF holds a fairly diversified portfolio with 169 debt securities across maturity papers, as per its portfolio as of October 2023. The top 10 holdings account for 38.7% of the fund’s assets.

58.2% of ABCBF’s assets are in corporate debt, 32.9% in G-secs, 4.4% in floating rate instruments, 1.3% in PTCs issued by banks and securitised debt, and the rest is in cash-and-cash equivalents. Only in the past month, it added an AIF, namely the Corporate Debt Market Development Fund, which currently comprises 0.2% of its portfolio.

In terms of rating profile, ABCBF mainly invests in AAA and equivalents (64% of the net assets per October 2023 portfolio) and sovereigns (32.9% of the net assets as per the October 2023 portfolio). Only a small portion of the net assets is invested in moderated rated and unrated debt securities.

Overall, ABCBF is a well-managed corporate bond fund. Since its inception in March 1997, the fund has delivered an appealing CAGR of nearly 9.0% and has surpassed the Crisil Composite Bond Fund Index and the category average returns on 2 years, 3 years, and 5 years returns. During periods of lower interest rates, ABCBF performed remarkably well and maintained a steady performance even when the interest rates moved upwards.

Hence, on a risk-adjusted basis, ABCBF also fared quite well, showcasing a Sharpe Ratio of 0.11 and Sortino Ratio of 0.20 (among the best in the category). ABCBF has a decent Yield-To-Maturity (YTM) of 7.9% as of December 01, 2023. But do note that this may vary as the fund manager buys and sells debt securities in the portfolio.

Aditya Birla SL Corporate Bond Fund is managed by Kaustubh Gupta (since April 2017), the Co-Head of Fixed Income at Aditya Birla Sun Life AMC Limited (ABSLAMC).

Kaustubh has over 18 years of extensive investment experience, having worked in various capacities of treasury finance, liquidity management and fund management. By qualification, he is a Chartered Account and CFA (Level 2).

Overall, these three Corporate Bond Funds follow appropriate risk management measures and have rewarded investors. They are from fund houses that follow robust investment processes and systems.

Who Should Invest in the Best Corporate Bond Funds?

Notably, the performance of Corporate Bond Funds is influenced by the credibility of the issuers they hold in the portfolio, the maturity of their portfolio holdings, and the interest rate movement. Remember that these funds are moderately sensitive to interest rate changes. Sharp fluctuations in the NAV of Corporate Bond Funds cannot be ruled out in the short term if interest rates face upside pressure. Thus, they are suitable for investors with a moderate-to-high risk appetite and an investment time horizon of at least 2 to 3 years.

What Are the Tax Implications of Investing in Corporate Bond Funds?

For all debt funds, with effect from April 1, 2023, the capital gain arising at the time of redemption — whether short-term (a holding period of less than 36 months) or long-term (a holding period of 36 months and above) — is also taxed as per investors’ tax slab. The indexation benefit that earlier helped to make the most of the inflation impact on the purchase value of the investment and effectively reduced the LTCG tax liability is now no longer available for Debt Mutual Funds.

[Read: Debt Mutual Funds are Now at Par with Fixed Deposits for Taxation]

For NRIs, the capital gains on debt-oriented mutual funds are subject to Tax Deduction at Source (TDS) at the rate of 10% for LTCG and 30% for STCG.

If you have opted for the dividend option (now known as IDCW option), for resident Indians, any dividends from Corporate Bond Funds (under the Dividend Option) are added to the investors’ total income and are taxed according to your income-tax slab, i.e., at the marginal rate of taxation. However, if the dividend amount is more than Rs 5,000, Tax Deduction at Source (TDS) will be first done at the rate of 10%. For NRIs, the dividend received is taxed at the rate of 20%.

To sum-up…

When you are considering adding a Corporate Bond Fund, consider the portfolio characteristics over the past returns or star ratings. The future of the scheme hinges on the quality of the underlying assets or securities it holds. Be prudent and thoughtful when approaching investments and align them well in line with your personal risk profile, investment objectives, and investment horizon. Invest your hard-earned money sensibly! And when in doubt, speak to a SEBI-registered investment advisor.

Happy Investing!

This article first appeared on PersonalFN here