Best corporate bond funds to invest in 2018

Looking for a debt mutual funds scheme to invest for a medium term of three to five years? Want a little extra returns with a bit of risk? Well, you may be looking for corporate bonds funds.

As per new Sebi categorisation, corporate bond funds must invest at least 80 per cent of their corpus in highest rated corporate bonds. That means these schemes would invest most of their corpus in corporate bonds that is rated AAA. That makes them a relatively lower risk option. However, since we are dealing with companies, there is always a bit of risk.

Sure, highest-rated companies are much more reliable than their counterparts rated lower. However, a higher rating doesn't mean that their ratings won't come down in future or they may not default on their payment. But the chances of them defaulting or suddenly becoming junk-rated are remote.


According to mutual fund advisors, debt mutual fund investors with moderate risk may consider corporate bond funds to invest for a medium term of three to five years. The corporate bond mutual fund category has offered around 6.52 per cent in the last three yeas, and 7.71 per cent in the last five years.

Here are our five recommended corporate bond funds.

Scheme	3-year returns (%)	5-year returns (%)
Kotak Corporate Bond Fund	7.60	7.97
ICICI Prudential Corporate Bond Fund	7.28	8.11
Reliance Prime Debt	7.32	8.07
Aditya Birla Sun Life Corporate Bond Fund	7.54	8.59
HDFC Corporate Bond Fund	7.45	8.50

Here is our methodology:
ET.com Mutual Funds 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 is less than 0.5, the series is said to be mean reverting.
iii) When H is greater than 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