Corporate Bond Fund

A corporate bond fund lends your money to India's better-rated companies rather than to the government. Because firms must pay a little more than the sovereign to borrow, these funds typically offer yields above G-Secs — recently in the 7-8% range — while the SEBI-mandated focus on top-rated paper keeps default risk modest.

How SEBI Defines It

Under SEBI's debt-fund categorisation, a corporate bond fund must park at least 80% of assets in bonds rated AA+ and above. That floor is the whole point: it forces managers toward the highest tiers of corporate credit — large, financially sound issuers — rather than chasing yield in shakier names. The result is a product that sits between the rock-solid safety of gilts and the higher risk of credit-risk funds.

The two risks that remain are worth understanding. Credit risk is low but never zero — even strong companies can be downgraded. Interest-rate risk depends on the fund's duration: when rates fall, bond prices rise and NAVs gain; when rates rise, NAVs can dip. Most corporate bond funds run short-to-medium duration, so they are less rate-sensitive than long gilt funds.

Returns, Taxation and Fit

Established funds have delivered roughly 7% annualised over recent three-year periods, with managers handling the bond selection and reinvestment that individual investors find hard to do well. They suit investors with a 2-5 year horizon who want better-than-FD potential without taking on equity volatility.

The big watch-out is tax. Following the rule change, gains on debt mutual funds — corporate bond funds included — are now taxed at your income-tax slab rate regardless of holding period. The old long-term capital gains benefit with indexation is gone. For high-bracket investors, this materially narrows the after-tax edge over fixed deposits, so the comparison must be done net of tax.

The Bottom Line

Corporate bond funds are a sensible core of a conservative debt allocation: predictable, high-quality and professionally managed. Just go in clear-eyed — check the actual portfolio for that AA+ concentration, mind the duration, and run the numbers after the new slab-based taxation before treating them as an FD replacement.