Invest in corporate bond funds for higher yields

THE WIDENING SPREAD between AAA-rated corporate bonds and government securities has enhanced the appeal of corporate bond funds as an income-generating investment option.

As interest rates peak, investing in these funds can help individuals achieve better risk-adjusted returns while effectively managing portfolio risk.

Corporate bond funds maintain a balanced exposure, with 40-45% invested in securities with durations ranging between one to three years and 45-50% in securities with durations exceeding three years.

Nirav Karkera, head, Research, Fisdom, says corporate bond funds offer the appropriate balance, providing the flexibility to invest across various durations based on prevailing market conditions and macro indicators."The widening of spreads between long-term corporate bonds and long-term government securities, now nearing 100 basis points, has become a compelling draw for investors," he says.

"This increased spread offers an attractive opportunity amidst global and domestic interest rate cycles reaching their peaks, enticing investors with the potential for higher yields compared to government securities." There are two drivers for returns on bonds. First is the coupon yield and second is the price yield. When bonds are issued, they are discounted at prevailing treasury yields.