Best corporate bond mutual funds to invest in 2023

Debt mutual funds had a tough year in 2022. Most debt schemes offered low single-digit returns during the year. This is mainly because the Reserve Bank of India was rising interest rates to contain the inflationary pressure in the economy. Debt mutual funds, especially long-term debt funds and gilt funds, lose money in a rising interest rate environment. Prices of debt instruments fall when their yields go up. In other words, the Net Asset Value or NAV of debt funds fall when interest rates go up. However, debt mutual funds are likely to have a better year in the coming year.

According to debt mutual fund managers, the RBI is likely to pause or stop hiking rates in 2023. That would mean better returns to debt mutual fund investors. Against this backdrop, are you planning to stick to relatively-safer schemes to take care of your short-term needs? If you are looking for ‘relatively safer’ debt funds to invest for three years or more, you can consider investing in corporate bond funds.

These schemes are mandated to invest at least 80% of their corpus in the highest-rated companies. This makes them relatively safer than other debt schemes such as credit risk funds. They are also safer than gilt funds and long term debt funds that are highly sensitive to interest rate changes in the economy.

You should pay attention to these two factors: safety and interest rates. Safety became a crucial factor for debt fund investors after a series of defaults and downgrades in the debt space almost three years ago. The shutting down of six schemes by Franklin Templeton Mutual Fund shook conservative investors in debt schemes. Though the environment is much better now, you should still be very cautious.

The second factor of interest rate changes assumes significance at the current juncture. The central banks were in the process of policy tightening in the world over. Now, they may stop hiking rates or start cutting rates in the coming months. This could result in better returns from debt funds.

Don't think that corporate bond funds do not have any risk. Sure, the highest rating of AAA offers you higher safety. But make sure your fund manager is not taking any extra risk to make extra returns.


Best Corporate Bond Funds to invest in 2023:

Methodology:
ETMutualFunds has employed the following parameters for shortlisting the debt mutual fund schemes.

1. Mean rolling returns: Rolled daily for the last three years.

2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.

ii)When H <0.5, the series is said to be mean reverting.

iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.

X =Returns below zero

Y = Sum of all squares of X

Z = Y/number of days taken for computing the ratio

Downside risk = Square root of Z

4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.

Asset size: For debt funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)