Corporate bond funds are debt mutual fund schemes which invest in corporate bonds or non-convertible debentures. Since corporate bonds are subject to credit risk, their yields are higher than those of Government bonds. The returns of corporate bond funds are therefore, usually higher than debt mutual funds of similar duration profiles which invest primarily in Government bonds. There is a variant of corporate bond funds, known as credit opportunities funds, which invest in the lower rated corporate bonds to get higher yields. Lower the credit rating of a bond, higher is the yield of the bond. In addition to interest rate risk, corporate bond funds are also subject to credit risk. Changes in credit rating of underlying bonds results in price changes and change in bond returns. Ratings upgrade causes the price of a bond to higher, while ratings downgrade results in price falling. Investors should understand the risk before investing in these debt mutual fund schemes.
