Credit risk funds can bring over 9 per cent returns, but with a dash of risk

Investors with appetite for risk could put money into credit risk funds which could return about 9% in the next one year. This debt scheme category, which invests predominantly in lower rated papers, has seen sharp outflows in recent times because of a slew of defaults and ratings downgrades in the wake of the IL&FS fiasco.

“Valuation is attractive due to higher spread of the schemes, yield to maturity (YTM) over the repo rate,” says Sankaran Naren, executive director, ICICI Prudential Mutual Fund.

Credit risk funds, which invest at least 65% of their corpus into AA+ funds and lower, have seen outflows of ₹8,000 crore in the last three months. As investors poured money into quality paper and fund houses to buy more AAA rated paper and government bonds, the spread between AAA rated paper and other securities has increased sharply. In the current scenario, fund managers point out that while a AAA rated paper gives a yield of 7.25%, an AA paper could give yields of 9% and an A rated paper could give 10%. These spreads are the highest in the last decade. For instance, the current spread of the portfolio of ICICI Prudential Credit Risk – one of the biggest in the category – over the repo is as high as 4.91%, the highest since December 2010. The average spread is 2.9%.

“The credit market is tight and good companies at higher yields. Fund houses with good process for credit evaluations should be preferred,” said Rupesh Bhansali, head (distribution), GEPL Capital.

He recommends ICICI Prudential Credit Risk Fund and Franklin India Credit Risk Fund, which have given returns of 8.85% and 8.37% over the last one year.

In the last one year, investors have lost money in credit risk funds. For instance, Boi Axa Credit Risk Fund lost as much as 48% of its value, while many others lost 2-5%.

Returns Scorecard
Source: Value Research | Returns are for direct plans