The type of debt funds that invest approximately 65% of the investment corpus in lesser than AA-rated papers are termed as Credit Risk Fund. These credit risk funds are known to invest in the low-grade instruments thus taking higher credit risk and promises to deliver higher returns on account of the same.
A Credit risk fund earns through the investment it makes in the debt & fixed income securities, thereby generating interest income and capital gains. (Capital gains are created when low-grade securities have a rating upgrade)
COVID-19 has been responsible for large scale disruption of economic activities around the globe and the after-effects of this are bound to be felt in the times to come. The most common risk in such times for credit risk funds is the risk of default as timely repayment of principal and interest becomes a big challenge for low credit-rated companies. A credit risk fund would require a stable and strong economic environment to show performance and which is not at all the case today.
The recent closure of six debt funds of Franklin Templeton has negatively impacted sentiments of mutual fund investors. Panicked investors may redeem their invested money in existing mutual fund schemes. However, facilities provided by the RBI will ensure a boost of confidence, liquidity and reduce volatility in such corporate debt papers. These will provide a lifeline to the mutual fund houses which are facing large redemption pressure.
RBI’s prompt action is an assurance that the central bank is reviewing the situation proactively, and they may introduce further measures to give mutual funds adequate liquidity support.
Should I invest in Credit Risk Fund?
“Debt is not always about Safety” – Investors should remember volatility is a common occurrence for credit risk funds, so such funds are not for the weak-hearted and risk-averse investors. Despite being a debt fund, credit risk funds come with a reasonably high risk as lower-rated papers are exposed to rating downgrade and high default rate.
Credit Mutual Fund historic returns & Asset Quality
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Asset Holding |
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Fund Name |
1-year Return |
Low Quality |
High Quality |
Cash |
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BOI AXA Credit Risk Fund-(G) |
-72% |
58% |
27% |
15% |
|
UTI Credit Risk Fund-(G) |
-29% |
65% |
20% |
15% |
|
IDBI Credit Risk Fund(G) |
-19% |
87% |
13% |
0% |
|
Nippon India Credit Risk Fund(G) |
-12% |
94% |
1% |
5% |
|
Sundaram Short Term Credit Risk Fund(G) |
-7% |
11% |
75% |
14% |
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Franklin India Credit Risk Fund(G) |
-5% |
110% |
0% |
-11% |
|
PGIM India Credit Risk Fund-(G) |
-5% |
71% |
17% |
11% |
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Baroda Credit Risk Fund-A(G) |
-2% |
81% |
14% |
6% |
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Principal Credit Risk Fund(G) |
-1% |
8% |
15% |
77% |
|
L&T Credit Risk Fund(G) |
0% |
58% |
33% |
9% |
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Aditya Birla SL Credit Risk Fund-(G) |
0% |
53% |
41% |
6% |
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DSP Credit Risk Fund-Reg(G) |
2% |
65% |
15% |
20% |
|
Invesco India Credit Risk Fund(G) |
2% |
12% |
72% |
17% |
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Axis Credit Risk Fund-(G) |
3% |
68% |
30% |
2% |
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Kotak Credit Risk Fund(G) |
5% |
71% |
25% |
4% |
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SBI Credit Risk Fund-(G) |
5% |
70% |
24% |
6% |
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HDFC Credit Risk Debt Fund-(G) |
7% |
71% |
24% |
5% |
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IDFC Credit Risk Fund-(G) |
7% |
68% |
28% |
4% |
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ICICI Pru Credit Risk Fund(G) |
8% |
83% |
12% |
5% |
As on – April 29, 2020
Based on these we would like investors to stay invested in G-Sec or PSU & Banking mutual fund which invests in Sovereign bonds and AAA-rated securities, ensuring high safety and liquidity to the investors.
Suggested Debt Funds
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Asset Holding |
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Fund Name |
1-year Return |
Low Quality |
High Quality |
Cash |
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IDFC Banking & PSU Debt Fund-(G) |
11% |
0% |
97% |
3% |
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SBI Magnum Gilt Fund-(G) |
17% |
0% |
98% |
2% |
As on – April 29, 2020
Investors are recommended to take a close look at the top holdings of their debt funds and their weightage in the portfolios.One should review their portfolios to check which debt mutual funds are exposed to low-rated securities.
Exit loads and Capital gains taxes are applicable on the redemption/sell.