Corporate bond funds have been among the key beneficiaries of the ongoing rate cut cycle, generating an average return of 9.9 per cent over the last one year. In comparison, longer-duration segments like gilt funds with a 10-year constant duration, long duration debt, and dynamic bond funds delivered returns of 11.6 per cent, 10.6 per cent, and 10 per cent, respectively.
Corporate bond funds present relatively better opportunities for conservative investors planning for 3-5 year investment horizons. With inflation largely under control and the RBI prioritising growth, the interest rate environment is expected to remain benign or even ease further. This supports strategies that focus on accrual, and offers an opportunity to benefit from falling spreads on corporate bonds, which could enhance returns. The declining trajectory of bank deposit rates further enhances the attractiveness of corporate bond funds for risk-averse investors seeking better risk-adjusted returns. Additionally, as rates fall, shorter-duration products carry higher reinvestment risks, making funds with a 3–4 year maturity, like those in this category, better suited to mitigate that risk while retaining moderate duration exposure.
Among the notable performers in this category is the Aditya Birla Sun Life Corporate Bond Fund. It has stood out for its above-average returns and emphasis on high credit quality. The fund, as per SEBI classification, primarily invests around 80 per cent in high-grade corporate bonds.
Moderate duration
The fund typically maintains 65–85 per cent of its portfolio in corporate bonds with maturities ranging from one to five years, adjusting this allocation based on the prevailing interest rate outlook. The remaining 15–35 per cent is deployed tactically to take advantage of interest rate fluctuations through longer-term corporate or sovereign instruments. This flexible strategy enables the fund to remain aligned with its core mandate while also capturing opportunities from rate movements. Over the next three to six months, the fund is expected to increase its non-tactical allocation toward 85 per cent, thereby reducing its exposure to longer-duration instruments.
Tactical flexibility
The fund’s 15-30 per cent government securities allocation serves a dual purpose. Primarily, it satisfies regulatory liquidity coverage ratio (LCR) requirements applicable to debt funds. It also helps the fund take duration calls, with current g-sec allocations concentrated in the 10-14 year segment, to capture the anticipated fall in rates.
Spread positioning
The fund managers view the 2–4 year corporate bond segment as especially appealing, while also identifying opportunities in 10-year papers. In a liquidity-rich environment, spreads tend to narrow. So the fund is well-positioned to benefit from both accrual income and capital gains driven by spread compression, a scenario likely to persist as policymakers continue to ease liquidity and maintain a dovish stance on rates.
AAA mandate
The fund successfully avoided the credit rating downgrades that plagued the market from 2018 to 2020. The portfolio remains entirely invested in AAA-rated securities or sovereign bonds. The fund has adhered to this approach consistently over the past 10–12 years, except for a brief post-Covid period when an allocation of 3-4 per cent to AA+ papers was made due to limited AAA supply. The current composition is tilted 80 per cent toward PSU bonds and 20 per cent toward non-PSU corporates.
Notable PSU bond allocations in the portfolio include SIDBI at 10.5 per cent, NABARD at 10 per cent, and PFC at 6 per cent. Among non-PSU bonds, key holdings include Bajaj Finance at 4 per cent, Bajaj Housing Finance at 3.2 per cent, and Tata Capital Financial Services at 2.2 per cent.
This portfolio approach, while reducing credit risk, also reduces return potential. Peer funds that have had exposure to AA securities as of April 2025 were Mirae Asset Corporate Bond Fund (5.7 per cent), PGIM India Corporate Bond Fund (6.7 per cent), Tata Corporate Bond Fund (14 per cent), and Franklin India Corporate Debt Fund (18 per cent).

Above-average returns
ABSL Corporate Bond Fund has historically delivered above-average returns across multiple rate cycles. During the post-Covid rate-cutting phase, the fund extended its average maturity up to 4.5 years, capturing capital gains from longer-duration bonds and delivering 12.6 per cent returns versus the category average of 11.4 per cent. Conversely, in rising rate periods, it cut maturity to minimise mark-to-market losses.
Over the past 12 years, the fund’s 5-year rolling returns averaged 8.1 per cent annually, beating the category average of 7.4 per cent. These returns have ranged from a low of 6.9 per cent to a high of 9.6 per cent.
As of April 30, 2025, the fund’s portfolio yield to maturity stood at 7 per cent, slightly above the category average of 6.9 per cent. The fund’s expense ratio for the regular plan is 0.51 per cent, below the category average of 0.7 per cent, while the direct plan’s expense ratio is 0.33 per cent, slightly higher than the category average of 0.31 per cent.
Published on June 7, 2025