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MUMBAI: I have made a one-time investment of Rs20,000 in HDFC Corporate Bond Fund in June 2020. How are the returns from Corporate Bond Funds calculated? The reason for asking this question is that there is not much appreciation in NAV. It was Rs23.96 at purchase and today the NAV is Rs25.29. Please also guide if it is worth holding for 2 to 3 years or sell it now.


Answer by Harshad Chetanwala, co founder,

Corporate Bond Funds invest a minimum 80% of their assets in high-rated corporate bond instruments. The fund manager of a corporate bond fund constructs its portfolio based on current economic and interest rate factors, Typically, the duration for most of the corporate bond funds ranges from 2 to 3 years. The duration of the fund can be looked like an indicator of risk. When it comes to debt funds, higher the duration higher is the interest rate risk. Corporate Bond Funds are moderately sensitive to interest rate changes and you may witness fluctuations in an uncertain and rising interest rate scenario.

If you look at last one year, the returns across most of the debt funds are low. This is because the interest rates continued to remain low in last year due to Covid 19 pandemic. Even from a future perspective the interest rates are not expected to rise suddenly and may follow a gradual progress as RBI continue to maintain accommodative stance and rightly so. Hence, your returns from debt funds including corporate bond fund can remain low for some more time.

The category returns of corporate bond fund in last one year has been around 6.8% and your investment from June 2020 which is nearing one year would have generated around 5.5% so far for you. HDFC Corporate Bond Fund at present has average maturity of 4.5 years which make it more sensitive to interest rate compared to most other funds in the category.

Also consider the quality of portfolio - whether the fund is investing strictly in high quality companies or taking risk by lending to companies with lower rating. From portfolio perspective, the portfolio of HDFC Corporate Bond Fund appears to be good. You may continue to hold the fund at present, but keep in mind the returns may remain low for some more time. The average maturity of your fund is also high, and hence it can be more sensitive to interest rate changes. As for your question on how long you should hold it, you can invest in Corporate Bond Funds with a three-year horizon.

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