Corporate bond funds: Overlook recent outflows, invest with 3-5-yr horizon

The outflows were due to liquidity tightness and consequent rise in yields, not due to a deterioration in the category's risk-return profile

In January 2026, corporate bond funds recorded a net outflow of ₹11,472.8 crore, the highest among all debt fund categories. Should retail investors be worried about this episode of fund outflow? 

On January 31, 2026, the category’s net assets under management (AUM) stood at ₹1,95,400.1 crore. 

Reasons for outflows 

Over the past three months, pressure on the Indian rupee (INR), tariffs and geopolitical uncertainty pushed up short-term rates despite liquidity actions by the Reserve Bank of India (RBI). “Liquidity tightening pushed yields higher across segments. Investors met near-term cash requirements by redeeming from corporate bond funds,” says Abhishek Bisen, head, fixed income, Kotak Mahindra Asset Management Company (AMC). He adds that the outflows did not reflect a deterioration in the category’s risk-return profile. 

The shorter end of the curve rose more. “Such reduced term spreads may have prompted an increased preference for other lower-duration categories,” says Anupam Joshi, fund manager, HDFC AMC. 

The fourth quarter of the financial year is generally a period of volatility in debt MF flows. “This is owing to year-end balance sheet management by corporates,” says Joshi.

 

“Heavy State Development Loans (SDL) supply and pre-Budget uncertainty made investors defensive towards medium- to long-term rates,” says Ritesh Nambiar, head of fixed income, Motilal Oswal Private Wealth Management.

 

Understanding corporate bond funds

 

Corporate bond funds are debt mutual funds that primarily invest in high-quality corporate debt securities. Regulations require them to invest at least 80 per cent in AA+ and above-rated corporate bonds, mainly from strong issuers such as public sector undertakings (PSUs), large banks and top-tier private corporates.

 

These funds invest across maturities and usually maintain an average duration of 2–5 years.

 

High credit quality

 

The high allocation of these funds to high-rated instruments lowers credit risk and supports liquidity. They can also offer better returns than gilts. “AAA corporate bonds offer 50–75 basis points (bps) higher yield than similar government securities (G-Secs). AAA corporate bond strategies can provide better risk-adjusted returns than G-Sec funds while maintaining high credit quality and relatively low volatility,” says Bisen.

 

Jiral Mehta, senior manager, research, FundsIndia, says corporate bond funds can offer better yields than bank deposits in many rate cycles. “Predictable income visibility is an advantage because the strategy is accrual-driven,” says Mehta.

 

Corporate bond funds can serve as a core debt holding. “They can help dampen overall portfolio volatility due to their focus on high-grade issuers and predictable cash flow structures,” says Bisen.

 

Interest-rate risk exists

 

These funds carry interest-rate risk. “With 1–5-year durations, these funds are sensitive to yield moves. As the RBI pauses at 5.25 per cent and global yields stay high, rate-cut gains have faded. A rate rise could cause mark-to-market losses,” says Archit Doshi, senior vice president, AMC, PL Capital.

 

These funds usually maintain a medium duration. “They are less sensitive than long-duration or gilt funds but are still affected when yields rise,” says Mehta.

 

A corporate bond fund does not mean zero credit risk. “Twenty per cent can go to lower-rated debt. Even AAA issuers can be downgraded, hurting prices,” says Doshi.

 

Mehta says some managers may keep a small lower-rated allocation to enhance yield.

 

Whom are these funds suited for?

 

Corporate bond funds suit conservative to moderate-risk investors who seek capital preservation and steady, inflation-beating returns higher than fixed deposits. “They suit 3–5-year goals and help equity-heavy investors add stability and cushion market volatility,” says Doshi.

 

These funds hold a strong place in India’s debt fund space due to the Securities and Exchange Board of India’s (Sebi’s) strict quality mandate. “Corporate bond funds serve as a low-risk, steady-return, and professionally managed avenue for medium-term investors looking to generate regular income without compromising on credit quality,” says Umesh Sharma, chief investment officer (CIO) – debt, The Wealth Company Mutual Fund.

 

“They can complement bank deposits and liquid or ultra-short funds for investors with a roughly 2–4-year-plus horizon,” says Nambiar.

 

Who should avoid these funds?

 

Investors who seek very high returns, similar to credit-risk or lower-rated debt categories, should avoid these funds. “Corporate bond funds prioritise high-quality AA+ and above securities and therefore generate only moderate yields,” says Sharma.

 

Aggressive yield chasers expecting double-digit returns from their debt allocations must look elsewhere. Expecting equity-like returns from a corporate bond fund would also be a mistake.

 

Investors with a horizon of less than one year should also avoid these funds.

 

Allocation to these funds

 

According to Doshi, conservative investors can keep 60–75 per cent in debt, with 40–50 per cent of that in corporate bond funds. He adds that moderate investors can keep 30–40 per cent in debt, with 30–40 per cent of that in corporate bond funds. High-risk investors may hold 10–20 per cent in debt, allocating 15–25 per cent of it to corporate bond funds.

 

Advice for existing investors

 

Investors should not panic over the January outflows, but they should review their fund’s latest factsheet. “The first red flag to check is an anomalous yield to maturity (YTM). With the category average currently sitting at around 7.2 per cent, any fund boasting much higher yields is likely engaging in dangerous yield chasing,” says Doshi.

 

Investors should also review how the portfolio maturity profile has changed in recent months and assess duration-related risk. 

The writer is a Mumbai-based independent journalist