Credit risk funds may find favour as worst seems over

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Published: August 27, 2019 6:17 AM

The category of credit risks funds has delivered returns of just 0.36% in the last one year.

According to markets participants, yields of AAA-rated papers for two-three years are anywhere between 6.80% and 7%, but yields of AA-rated papers is at around 9%.

In the last one year, debt funds, especially credit risk funds, have been in the spotlight due to downgrades and defaults in the debt papers, which impacted their returns. But with the worst seems to be over now, fund managers believe that this could be a good time to invest in credit risk funds for the next one-three years.

Market participants say one of the reasons for credit risk funds turning attractive is because the spreads between AAA-rated bond and AA-rated bond is over 200 basis points (100 basis points = 1%), giving better opportunity at this point of time. Credit risk funds are mandated to invest at least 65% of total assets in below AA-rated instruments.

Dwijendra Srivastava, CIO – debt at Sundaram Asset Management Company, said, “Credit risk funds looks attractive at this point of time as spreads between high quality three years AAA-rated paper and AA-rated paper is around 200 basis points and that can give good returns in the next two-three years.”

According to markets participants, yields of AAA-rated papers for two-three years are anywhere between 6.80% and 7%, but yields of AA-rated papers is at around 9%.

Manish Banthia, senior fund manager – fixed income at ICICI Prudential AMC, said: “Credit risk funds are looking attractive from the valuations point of view. In the last few months, we have seen fall in repo rates, yields of government bonds and AAA-rated bonds. On the other hand, yields of AA- and A-rated papers have not seen a corresponding fall. So, spread between AAA-rated papers and AA/A-rated papers is high and offers potential to generate better risk adjusted returns over the next two-three years.” He added that investor sentiments are weak and that is a positive investment signal.

The category of credit risks funds has delivered returns of just 0.36% in the last one year. Several credit risks funds such as IDFC Credit Risk Fund, ICICI Prudential Credit Risk Fund, HDFC Credit Risk Fund and Kotak Credit Fund are funds that have given returns of over 8% in the last one year, show the data from Value Research. In the last one year, debt funds have seen several mark down, due to the default or downgrades of various debt papers impacting returns.

But there is a caution for investors before investing in credit risk funds. “It is always wise to invest in credit risk funds for investors having high risk appetite. The should have not more than 5-10% of exposure in such funds. The most important point to remember while investing in credit risk funds is that credit events are binary in nature. If there is default in unsecured securities, funds will not be able to recover any money and if investments are secured, recovery can take time. So one has to understand all the factors before investing in credit risk funds,” said Srivastava.

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