Are corporate-bond funds better than short-duration funds?

How are corporate-bond funds different from short-duration funds? Are they a better option?
- Anand Prakash Yadav

Corporate-bond funds invest only in companies' bonds, whereas short-duration funds invest in a mix of corporate bonds and government bonds of a wide variety. So, from the risk-return perspective, a short-duration fund may turn out to be a little less risky. It can also have a longer maturity because corporate bonds are not available with that long maturity.

Corporate bonds may look more rewarding in the short run if they actually slip on the quality scale. If there are corporate bonds with lower credit rating, they may be yielding higher returns but they will come with higher risks. And the risk will visit you once in a while, but before that you can only see returns. So just be careful with them. Also, don't chase the best-performing debt fund. This is the cardinal rule which any fixed-income investor should follow.

This article was originally published on May 06, 2021.