Credit risk

Credit risk funds are making a comeback in 2021; mattress topper offer 22%

Credit risk funds have been the turnaround story of 2021. These funds have been going through a bad phase since 2018, with a series of defaults and downgrades affecting the NAVs of the largest schemes in this category. After that, credit risk funds were almost written off by mutual fund investors. However, some of these funds offer returns of over 20% in one year.

The performance indicates that the schematics have finally come out of the bad phase that started with the defaults and downgrades in 2018 with IL&FS. Credit risk funds have offered returns of 8.68% year-to-date and 9.05% over the past year. The best in class did much better with high double-digit returns, but the laggards dragged down the category average.

The three main credit risk funds 1 year returns (%)
UTI credit risk 22.48
Baroda credit risk 20.42
IDBI credit risk 5:41 p.m.

After a strong start in January with a net inflow of Rs 366.44 crore, the credit risk category had a net AUM of Rs 28,967.11 crore. There were 10 separate wallets in the category with a total AUM of Rs 263.77 crore. From February, admissions began to decline. In February, the category saw a huge outflow of Rs 829.52 crores. This was followed by a release of Rs 169.72 crore in March and Rs 1,880.36 crore.

in April. However, the category performed a turnaround starting in April and continued to see continuous inflows through November 2021. The number of separate portfolios dropped to 8 in November.

Experts believe that credit risk funds are risky but can also offer higher returns. They say that for a three-year outlook, the risk-reward ratio is in favor of credit risk funds. “After the violent jolt of the past few years, many credit risk funds have realigned themselves with the label and maturity profile. However, this is aimed at moderate to aggressive bond investors who can stay at least 3 years” , says Santosh Joseph, Founder- Germinate Investor Services, based in Bangalore.

From August 2018 to early 2020, credit risk funds experienced a number of defaults which led to declines in net asset value. These defects have occurred in well-established companies. Some of these failing companies included IL&FS, ADAG, DHFL, Yes Bank, Altico and Essel. BOI AXA Credit Risk Fund, UTI Credit Risk Fund and IDBI Credit Risk Fund are examples of schemes that are still recovering from defaults.

Mutual fund advisors believe investors shouldn’t make the same mistake of investing based on one-year returns. Only investors who understand the risk of these schemes and have the ability to take risks should opt for credit risk funds. They must also ensure that the plan’s portfolio is not concentrated.