Corporate bond funds are back in vogue. Here’s why

ET Intelligence Group: Debt investors have shown high preference for corporate bond schemes in recent months. The latest data from Association of Mutual Funds of India (AMFI) shows that corporate bond funds received inflows of Rs15,051 crore in October., the highest in the past nineteen months.There are four factors behind this momentum. First, the composition of corporate bonds in the mutual fund schemes is changing in favour of less riskier papers. These schemes have enhanced exposure to securities rated as AAA and AA+ from earlier allocation to AA and AA- securities. Higher rated securities offer more comfort to investors.Second, returns of corporate bond schemes are favourable. “Considering long-term indexation, corporate bond schemes offer relatively higher returns than fixed deposits (FDs),” said Rupesh Bhansali, head-mutual funds, GEPL Capital. He added that corporate bond schemes may fetch close to 5% returns after tax while FDs are likely to provide around 4% returns.Besides, the RBI’s positive forward guidance has also boosted inflows. Anurag Mittal, senior fund manager, debt, at IDFC Mutual Fund, said, “RBI continues to support growth and views ‘inflation’ as a transitory issue. This has offered confidence to bond market investors as it increases the likelihood of surplus liquidity in the next fiscal year.” This means interest rates may remain stable in the foreseeable future.Lastly, rising acceptance of schemes with roll down maturity, which offer a higher return visibility, has helped in improving fund flow in the debt schemes. “Fund houses pursuing roll-down maturity type of corporate bonds are seeing increasing flows,” said Mittal. In the case of a roll-down maturity, whenever there is a fresh investment in an open ended mutual fund, the fund manager buys securities which mature in sync with the remaining duration of the scheme.
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