Corporate Bond Funds — The Quality End of Company Lending

The defining rule is a minimum share of the portfolio in corporate bonds carrying the highest credit ratings. The scheme can hold other things around that, but the bulk has to sit at the top of the quality scale.

Those borrowers are large, established companies and institutions that lenders judge very likely to pay. They therefore pay less to borrow than weaker borrowers would, which is the trade being made: less yield in exchange for a much lower chance of a payment problem.

Our page on debt funds covers the broader family, and credit risk funds covers the category with the opposite requirement.

The high-quality requirement addresses one of the two risks in any debt holding and leaves the other untouched.

Credit risk is much reduced. A default in the highest-rated segment is rare, and the diversification across many borrowers means one problem would be a dent rather than a disaster.

Interest rate risk remains in full. When general borrowing rates rise, the market price of existing bonds falls, and the scheme is valued at market prices every day. So a corporate bond scheme can show a decline over months without any borrower missing a payment, which is the same mechanism our page on gilt funds describes.

People who chose this category for safety and then saw a fall are usually meeting that second risk for the first time.

Worth stating even in a high-quality category, because the comfort can be overdone.

A credit rating is an assessment that gets revised, and revisions frequently follow trouble rather than precede it. Highly rated borrowers have run into difficulty before, in India and elsewhere, and the rating changed afterwards.

That is not an argument against the category. It is an argument for looking at the actual holdings rather than at the rating summary alone: how much sits with any single borrower, and whether the portfolio is spread across sectors or concentrated in one. Our page on the fact sheet shows where to find both.

The other number that decides behaviour is how long the bonds have left to run, which the fact sheet reports as average maturity and duration.

A scheme holding longer-dated bonds moves more when rates change, in both directions. One holding shorter-dated paper moves less. Two corporate bond schemes with the same credit quality can therefore behave quite differently, and the category name says nothing about it.

The practical rule that follows: your holding period should be at least as long as the scheme typical maturity profile, so that a rate movement has time to pass rather than landing on you at the moment you need the money.

Four categories get compared here and the distinctions are not subtle once laid out.

Liquid schemes are for money that may be needed within weeks, as our page on liquid funds covers. Corporate bond schemes suit a horizon of a few years. Gilt schemes remove credit risk almost entirely and take on more rate sensitivity. Target maturity schemes add an end date, which our page on target maturity funds explains.

None of them is the safest in every sense. Each is safest against a different risk, which is why the useful question is what you are protecting against rather than which is safest overall, as our page on risk and volatility sets out.

The category rule sets a floor, and individual schemes frequently commit to more than the minimum. The place that is written down is the scheme information document.

Two things are worth checking there rather than assuming. What share the scheme has committed to holding at the highest ratings, which may be above the category requirement, and what it is permitted to hold with the remainder. A scheme allowed to place a portion in lower-rated paper behaves differently from one that is not, even though both sit in the same category.

The other entry worth reading is the permitted range of maturities, since that decides how much the value moves when rates change. Our page on the scheme information document explains which sections repay the effort and which can be skipped.

None of this takes long, and it answers a question the monthly fact sheet cannot: not what the scheme holds today, but what it is allowed to hold next year.

Typically for the stable portion of a portfolio where the money has a horizon of a few years and the household wants something a step up from a deposit in flexibility.

It is also used as the receiving end of a transfer plan, holding a lump sum while it moves gradually into equity, which our page on the systematic transfer plan describes.

What it is not is a buffer. Money that must be available at a known value belongs somewhere it cannot fall, as our page on building an emergency fund sets out. Before investing, check the average maturity, the largest holdings, the expense ratio and the exit load. We are distributors rather than investment advisers and recommend no schemes; if you want to check what your existing debt holdings actually contain, get in touch.