Credit risk

Credit risk fund: BOI AXA Credit Risk Fund offers 150% return in one year

BOI AXA Credit Risk Fund, one of the worst defaulted programs of 2019, is suddenly at the top of the performance rankings. With returns of 149% in one year, the program is among the top performers in the area of ​​credit risk, followed by UTI Credit Risk Fund with returns of 22% in one year. Many investors wonder how a debt fund can deliver returns greater than 100% in one year.

After a series of defaults hit the program from 2018 to 2020, the most recent blow to the program came when it lost 50.22% in April 2020 as the fund house wrote down various securities of debt. BOI Axa Credit Risk Fund had canceled all of its exposure to IL&FS in 2018. The program has not fully recovered from defaults that occurred throughout 2019 and 2020.

Financial planners are not thrilled with the high returns displayed by the program. “The rise in the program is due to the takeover of two companies – Sintex BAPL and Amanta Healthcare – which were written off earlier. In the corporate default cycle from September 2018 to March 2020, BoI AXA Credit Risk Fund was the most affected, by multiple faults, in the fund peer group. Some recovery is the saving grace. The optically high returns are due to the low basis, which has occurred due to write-downs,” says Joydeep Sen, author and corporate trainer.

Mutual fund advisors believe the plan still has a lot to recover. “Today, although many companies have made their redemptions, the fund has just generated a CAGR of 0.35% since inception, this clearly shows that the fund has a lot to recover and has a very long way to catch up” , says Rushabh Desai, founder. , Rupee with Mumbai-based Rushabh Investment Services.

Mutual fund advisors say investors shouldn’t fall for these eye-popping returns, but rather choose their investments with a great deal of caution. They say investors should keep in mind that capital preservation should be the top priority before venturing into the debt segment. Some of them also suggest staying out of the credit risk space, even though the category has topped the yield charts among debt programs for over a year now.

“Taking credit risk to earn 1-2% more is not recommended and makes no sense. Over the past few years we have seen so many downgrades and defaults that have plagued many funds from debt, especially in the low credit quality space. The debt space can sometimes be riskier than equities. Also, the average raw YTM in the credit risk category is around 6.2 % and the average expense ratio is around 1.6%, bringing the net YTM down to around 4.6%.This does not do justice to the risk these funds are taking. overall returns End investors should completely avoid the credit risk segment and its category,” says Rushabh Desai.