Individuals should consider investing in corporate bond funds to build a robust accrual-oriented fixed income portfolio. As ‘AAA’ rated corporate bond yields are in the 7.8-7.9% range, investors can lock into relatively high-quality credit at attractive yields.
For investors looking to build the core fixed income portion of their portfolio, corporate bond funds offer a balance of accrual income, portfolio stability and reasonable duration exposure while maintaining high credit quality.
Healthy spread
“Corporate bond funds continue to offer a healthy spread over comparable G-Sec yields, making them attractive for accrual-oriented fixed income investors,” says Aditya Agarwal, co-founder, Wealthy.in, a wealth management platform.
The fund category has delivered average returns of 4.4% over 1-year, 6.9% over 3-year and 5.8% over 5-year. Over shorter periods, returns have moderated due to interest rate volatility, but medium- to long-term returns have remained relatively stable, reflecting the accrual-driven nature of the category.
“Going forward, with portfolio yield-to-maturity (YTM) largely between 7.3-7.7%, investors can expect accrual to remain the primary driver of returns,” says Nirav R Karkera, head of research, W by Groww, wealth management arm of Groww.
Keep bond portfolio short
Navigating Inverted Yield
The market has already started factoring in the risk of higher rates. In fact, the AAA-rated PSU corporate bond yield curve is now inverted, which means liquidity is likely to stay tight. “In such a scenario, it is better to keep the bond portfolio short and let the accrual work,” says Sonam Srivastava, founder, Wright Research PMS.
The best opportunities right now are in high-quality corporate bonds with maturities of two to four years, where there is the widest spreads and manageable reinvestment risk. Investors with a staggered or laddered maturity approach can benefit from both portfolio stability and periodic reinvestment flexibility.
Avoid chasing yields
While corporate bond funds predominantly invest in AAA-rated securities, investors should still review the underlying portfolio quality and avoid chasing yields through lower-rated credit exposure.
The YTM should be in line with the category average of 7.5%. “Any fund showing higher numbers is likely taking on credit or duration risk that isn’t visible at first glance,” says Rishabh Nahar, partner, Qode Advisors.
Investors should have a 2-3 years horizon to allow the accrual income to play out while reducing the impact of interim interest rate movements. Corporate bond funds with longer maturity profiles may witness higher volatility during periods of rising interest rates, whereas shorter-to-medium duration portfolios tend to offer relatively greater stability through accrual income.