Corporate bond funds are a category of debt fund which are mandated to invest at least 80% of their money in highly rated (AAA or AA) debt papers issued by companies.
Corporate bond funds are considered to be less risky than credit risk funds as they invest a majority of their assets in highly rated papers. Also, they don’t take duration calls like long-term bond funds. Funds that take duration calls are more sensitive to interest rate changes and are, therefore, more vulnerable to interest rate risk. According to data from Value Research, the average maturity of the funds in this category is around three years, as per the October portfolio.
However, nothing is risk-free in case of debt funds. We have recently seen that even highly rated debt papers such as those of IL&FS and DHFL groups defaulted. Also, these funds can invest 20% in papers that are not highly rated.
Having said that, these funds are for slightly conservative investors who don’t want to take too much credit or interest rate risk to earn that extra bit of return.