Credit risk

Credit risk funds offer double, triple digit returns. Should you invest?

Credit risk funds, which were hit hard by a series of defaults and downgrades in 2018 through early 2020, have rebounded to offer average returns of 19% over the past year. This is when most other mutual fund categories struggle to match the returns of fixed bank deposits. BOI AXA Credit Risk Fund outperformed all other funds in the category with triple digit returns of up to 150%. What caused this tremendous performance? Should you invest in these funds to get higher returns? How to select a good credit risk fund? Here is a truth.

What caused double and triple digit returns?

Our country’s overall macro looks really good. According to Devang Shah, co-head of fixed income at Axis AMC, strong capital, an unleveraged balance sheet, raised cash and all sorts of government and Reserve Bank of India (RBI) intervention to ensure that it no accident leads to improvement on the debt side. Over the past 12 months, Shah adds, upgrades have outperformed downgrades by a huge margin. A better macro contributed to a significant improvement in the credit cycle.

However, an investor should not fall into the trap of outliers. The massive outperformance of some of these plans is a rollback of previous downgrades or restructured or defaulted assets. Manish Banthia, senior fixed income fund manager, ICICI Prudential AMC, explains that the extraordinary returns from some of these schemes came largely from recoveries of assets that were marked down to lower prices.