A Corporate Bond Fund

A Corporate Bond Fund invests not in equities but in Corporate Bonds.

A Corporate Bond is basically a loan from you to a company who has to provide you an income (usually called the coupon) over the term after which the company ‘settles its account’ with you by repaying your capital. A Corporate Bond fund invests in a range of different Corporate Bonds and spreads your risk by diversifying across a number of companies.

Bonds are much less risky than equities and can be suitable for the more risk adverse client. Take care, however, and don’t follow the headline rate (the insurance company’s big advert). An offer of say 6-12% is meaningless. Take care to look at what Bonds are being held by the manager and their true risk.

As an example, higher risk companies are paying a better income (coupon). Better to look at the fund manager’s ability in the past to pick companies who are less likely to default on their liabilities. The key criterion to select is what percentage of the money is invested in investment grade and what percentage is invested in non-investment grade bonds.

To explain this, higher investment grade bonds are companies that are likely to fulfil their requirements of both income payments to you during the life of the bond, and capital repayment at the end of the term.

Non-investment grade companies are typically less successful companies and therefore have to offer higher income in order to attract the capital to be invested with them.

Compared with companies issuing investment grade bonds, the rate of default on non-investment grade bonds is much higher. Therefore a fund investing predominantly in investment grade bonds is considered to be lower risk; however, the targeted income it produces is likely to be lower than a fund invested in non-investment grade bonds. Funds in non-investment grade bonds will produce a higher targeted income, but will have a higher default rate and will therefore be higher risk.

The next important point is to look at how charges are applied and whether or not they are taken from income or capital.

As an example, someone might offer a 7% income; however, charges may be applied to capital, which in effect really means that your capital will be depreciating in value if you take maximum income. These represent a good opportunity for basic rate taxpayers and for those clients seeking income from investments.

Remember, since 2004 there are no longer any income tax advantages for basic rate taxpayers by investing in equity ISAs.

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Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made