Credit risk

The best time to invest in credit risk funds, but be risk-aware

“Over the next 3-6 months valuations will be very attractive and now is a good time for retail investors to jump into credit risk funds,” said fixed income fund manager Manish Banthia. ICICI Prudential Mutual Fund. He was speaking at the Morningstar Investment Conference 2022 in Mumbai.

Credit risk funds have returned from the turbulent phase of 2018-19. The schemes have delivered decent returns over the past few years, and so far the category is doing better than its debt fund counterparts. Debt fund managers said now is a good time to invest in credit risk funds as valuations and outlook are very positive.

“The good news is that credit funds are the best performing instruments, even in 3 and 5 years. Looking back today, it doesn’t look so bad. Today things are very different. Yields are much lower and this is a very attractive opportunity,” said R Sivakumar, Head-Fixed Income, Axis Mutual Fund.

Fund managers were discussing the outlook and risks of credit risk funds. They believed the new regulations had made credit risk funds less risky and better for retail investors.

“In 2013, an interest rate shock came out of nowhere when most retail investors invested in long duration funds. Then came 2018-2019. It highlighted credit risks in portfolios. Today, the system is much better. From a mutual fund perspective, there are many changes and regulations that give you a better understanding of risk. All of these settlements were a consequence of what happened in 2018-2019. As the rate cycle reversed, liquidity began to unwind. Changes have happened, but many improvements are needed,” said Rajeev Radhakrishnan, Head of Fixed Income, SBI Mutual Fund.

R Sivakumar said that due to SEBI regulations and the liquidity mandate for credit risk products, funds are now required to have some g-sec in the portfolio. This makes the product more stable and the managers also do not take additional risks.

Even with the strong performance, many investors are not very comfortable getting into credit risk funds due to the events that unfolded in 2018-19. Fund managers said the scenario has changed, but investors should still be careful with the risk involved in these schemes.

“If I look back to 2018, investors were chasing YTMs and the risk was not taken seriously. Convincing investors to consider the risk involved was becoming very difficult, and then we saw the impact that this 2020 was the best time to invest in AA assets, but retail investors got scared and sold the assets.The difference between stocks and the credit risk portfolio is that whenever the risk comes from credit, it becomes significant. It might not remain volatile. It is very important for investors to assess the risk and understand the level of risk they want to take for additional returns,” said Manish Banthia, fund manager at fixed income, ICICI Prudential Mutual Fund.