Corporate Bond Fund
An open-ended debt scheme that must invest at least 80 percent of total assets in corporate bonds rated AA+ and above — the higher-quality counterpart to the credit risk fund.
In plain language
Companies borrow by issuing bonds, and rating agencies grade how likely they are to repay. A Corporate Bond Fund is a debt scheme that lends mainly to the better-rated borrowers.
The workbook's definition: an open-ended debt scheme predominantly investing in AA+ and above rated corporate bonds. The minimum investment in corporate bonds shall be 80 percent of total assets (only in AA+ and above rated corporate bonds).
It is one of 17 debt sub-categories, and it is best understood next to its opposite, the Credit Risk Fund.
How it works
The two corporate-debt categories side by side.
| Corporate Bond Fund | Credit Risk Fund | |
|---|---|---|
| Minimum in corporate bonds | 80% of total assets | 65% of total assets |
| Ratings allowed for that minimum | AA+ and above | AA and below — AA+ excluded |
SEBI also forbids scheme names that highlight only the return side — credit opportunities fund, high yield fund, credit advantage and the like.
The risks that remain. A higher rating reduces risk; it does not remove it. Chapter 7 lists what a corporate bond portfolio still faces:
- Credit risk — the issuer's inability to pay interest and principal. Corporate bonds carry more of it than government securities, and AAA bonds are comparatively less risky than AA bonds.
- Rating migration risk — a one-notch downgrade from AAA to AA+ hurts the bond's price, and an upgrade helps it.
- Term structure of interest rates risk — when rates rise, bond values and the NAV fall.
- Reinvestment risk on coupons and maturities.
Tax and disclosure. Chapter 8 taxes debt-oriented funds at the marginal slab rate on both short- and long-term gains, and portfolios of debt schemes are disclosed fortnightly, within 5 days, with the yield of each instrument.
A worked example
A corporate bond fund has Rs 1,500 crore of assets. Figures are illustrative apart from the category rule.
The rule in rupees. At least 80 percent — Rs 1,200 crore — must be in corporate bonds rated AA+ or higher. A credit risk fund of the same size would need at least Rs 975 crore (65 percent) in bonds rated AA or lower.
A downgrade. The fund holds Rs 60 crore of one issuer's AAA bonds. The issuer is cut one notch to AA+, and the bonds fall 1.2 percent in price.
Fall in value = 60 crore × 1.2% = Rs 72 lakh
As a share of the fund = 72 lakh ÷ 1,500 crore ≈ 0.05%
A 0.05 percent dip in NAV — and an AA+ bond still counts towards the 80 percent. A further cut to AA would take it outside the AA+-and-above bucket, so it would no longer count towards the category minimum.
Mohan's Rs 4,00,000 in the fund loses about Rs 200 on the day. His real exposure is in the concentration: had the fund put Rs 300 crore in that one issuer, the same move would have cost him about Rs 960.
Why NISM asks about it
Chapter 2.2.4 lists the Corporate Bond Fund as debt sub-category 11, directly before the Credit Risk Fund, and the pair is a classic matching question: 80 percent in AA+ and above against 65 percent in AA and below (excluding AA+). Chapter 7.3 supplies the credit and rating migration risks, and Chapter 8 the slab-rate taxation of debt-oriented funds.
Common exam traps
- Corporate Bond Fund: 80% in AA+ and above. Credit Risk Fund: 65% in AA and below, excluding AA+. Both the percentage and the rating line are tested.
- AA+ belongs to the Corporate Bond Fund, not the Credit Risk Fund.
- High rating is not no risk — downgrades, defaults and interest rate moves still reach the NAV.
- A downgrade from AAA to AA+ lowers the price even though the bond is still investment grade and still eligible for the category.
- Return-only names like "high yield" or "credit opportunities" are not allowed for these schemes.
- Debt-oriented funds are taxed at the marginal slab rate, whatever the holding period.
Where this is taught
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
Related terms
- Credit ratingAn opinion on how likely a borrower is to service an instrument on time, reduced to a symbol by a SEBI-registered rating agency — and reviewed continuously, not fixed for the life of the bond.
- Credit riskThe risk that a borrower fails to meet its obligations on a debt instrument — the risk credit rating agencies exist to grade, and the one that triggers a segregated portfolio in a mutual fund.
- Interest rate riskThe risk that an investor in a debt instrument loses return because rates rise — existing instruments carrying the old, lower coupon fall in value until their yield matches the new market rate.
- Credit risk fundAn open-ended debt scheme investing at least 65% of total assets in corporate bonds rated AA or below (excluding AA+) — accepting higher credit risk in pursuit of higher yields.
- Marginal Slab RateThe investor's own applicable income-tax slab rate. It taxes IDCW, short-term gains on most non-equity schemes, and all gains on debt-oriented funds and debt ETFs.
- Portfolio disclosureThe published list of the securities a scheme holds, with market values and ISINs — monthly within 10 days for all schemes, and fortnightly within 5 days, with yields, for debt schemes.
- Downgrade riskThe risk that a rating agency lowers an issuer's credit rating after an investor has bought its bonds, pushing the market price of those bonds down even if no payment is ever missed.