Investors pump over Rs 11K crore in corporate bond funds in 3 months

Experts cite better risk-reward for investors with 3-year horizon

Inflows into corporate bond funds have risen to multi-year highs in recent months with the risk-reward dynamics of AAA-rated corporate bonds improving significantly vis-a-vis government securities (g-secs), especially in the near term.

 

The inflows into corporate bond funds jumped sharply in September 2024 to a multi-year high of Rs 5,039 crore. Investors poured in another Rs 4,644 crore in October. Including around Rs 2,200 crore estimated inflows in November, the three month tally rises to Rs 11,883 crore.

 

According to experts, the higher yields offered by corporate bonds and the rally in g-sec having already run most of its course makes a case for corporate bond funds, especially for investors having a short-to-medium investment horizon.

 

 

"It makes sense to be in corporate bonds right now, especially for those who have a shorter investment horizon. While the rate cuts may benefit g-secs more, corporate bonds have the 'spread' advantage. The yield being offered by AAA corporate bonds is around 50 bps higher," said Joydeep Sen, corporate trainer (financial markets) and author.

 

The yield on a 5-year g-sec has come down from 7.14 per cent at the start of 2024 to 6.66 per cent now. In the same period, the 5-year corporate bond benchmark yield has increased from 7.47 per cent to 7.8 per cent.

 

"In the last few months, the sovereign curve has reset lower mainly due to substantial flows which have come in post India’s inclusion in the global bond indices. However, similar flows were not seen in corporate bonds. In addition, quantum of supply of the corporate bonds continued on account of refinancing issuances as well as usual requirement on account of credit growth. This has resulted in widening of the spreads to more than the average spread seen in last few years especially in AAA-rated segment," said Prashant Pimple, CIO -Fixed Income, Baroda BNP Paribas Mutual Fund. 

 

Amount raised via corporate bonds in the first half of the financial year (FY) 2025 rose 6 per cent to Rs 4.98 trillion compared to Rs 4.7 trillion during the same time last year.

 

According to Jalpan Shah- Head Fixed Income at Trust MF, the improvement in banking liquidity and the expected rate cuts are likely to benefit corporate bond investors.

 

"In the current scenario where growth impulses are weaker while inflation is likely to trend lower in the coming months, the MPC is likely to reduce interest rates over the next year and infuse durable liquidity into the banking system, the corporate bond fund category is likely to benefit. This is why we have seen strong inflows in the corporate bond funds category," he said.

 

In 2024, debt funds with higher g-sec allocation have topped the returns chart. Excluding credit risk funds, long duration funds lead the returns chart with average return of 12.4 per cent in the one-year period.

 

Long duration funds largely invest in g-sec and state development loans (SDLs).

 

Gilt funds have also delivered double digit returns in the one-year period. Corporate bond funds have given 8.76 per cent return on an average.