Credit risk funds shine with 17.4% returns

Despite most debt fund categories witnessing dismal returns in the past year, credit risk funds continued to shine. They generated average returns of 17.4 per cent — the highest among debt fund categories.

The past few months have seen several debt fund categories delivering subdued returns because of the spike in bond yields. The data from Value Research shows that credit funds have given average returns of 10.11 per cent in the past three months, while several other debt funds have given returns of under 1 per cent (one-year gilt funds performed the worst with just 0.21 per cent return, on average).

According to market participants, in the past year, the spread offered by some credit risk schemes over similar tenure short-term bond funds was around 100-150 basis points, which helped credit risk funds deliver positive returns.

“Yield to maturity (YTM) of credit risk funds are higher than other debt categories. Normally, investors expect credit risk funds to give higher returns but various defaults in the category between September 2018 and March 2020 pulled down the returns of such funds,” says Joydeep Sen, corporate trainer-debt.

Since the fall of IL&FS, credit risk funds have been under constant focus. On numerous occasions, several credit risk funds have seen mark down on account of defaults on debt papers. But in the past year, credit risk funds have seen no major defaults, say industry participants.

BOI AXA Credit Risk Fund managed to give returns of 149.17 per cent in the past year. UTI Credit Risk Fund and IDBI Credit Risk Fund, on the other hand, returned 22.16 per cent and 16.50 per cent, respectively, shows the data from Value Research.

Of the 16 schemes, five schemes gave returns in excess of 10 per cent. Credit risk funds are debt schemes that take significant exposure (at least 65 per cent) to not-so-highly rated companies (AA and below) with an aim to generate higher returns.

Industry executives say the steps taken by the government and the Reserve Bank of India (RBI) since the outbreak of the coronavirus have helped nonaaa rated corporates to improve their financial condition. “Since March 2020, corporations have de-leveraged their balance sheet, resulting in very lower defaults and this has helped the category to give better returns. If the YTM of credit risk funds is higher than corporate bond funds and banking and PSU funds, investors can certainly look at this category of funds as the credit default cycle has stabilised,” adds Sen.