The conventional rule of investment says that you tend to take a higher risk in order to earn high returns. And lower the risk, smaller are the returns. The same rule applies to credit risk funds, too, which are riskier than safe funds such as sovereign funds.
They are debt funds that invest in low-credit quality debt securities. They have higher risks since they invest in low-quality instruments.
“The credit risk fund carries a higher risk compared to other debt funds as they may have some allocation in companies where the fund manager believes the credit ratings could improve from where they are today. This also helps them to generate additional returns along with some risk. While investing in debt funds, the quality of the portfolio is an important factor,” said Harshad Chetanwala Co-Founder, Mywealthgrowth.com.
As per Value Research data, past one year returns of credit risk funds as a category stood at 17.51 percent — a high rate of return by any standard.
In past three months, meanwhile, the returns were 10.06 percent and the figure was 8.64 percent in one month period. The three-year returns, ironically, were quite muted at 3.76 percent.
Returns by credit risk funds
|Time period||Returns (%)|
(Source: Value Research)
Chetwanwala says that investors can check the diversification of the portfolio across different companies and the size of the fund at the time of investing. “This will help you understand the extent of risk on the overall investment in Credit Risk funds. These funds are meant for investors who have a higher risk appetite,” he adds.
|Mutual Fund||One-year-return (%)||Three-year-return (%)|
|Baroda BNP Paribas Credit Risk Fund||15.01||8.35|
|IDBI Credit Risk Fund||17.56||2.36|
|Nippon India Credit Risk Fund||13.45||3.14|
|UTI Credit Risk Fund||22.73||-5.28|
|SBI Credit Risk Fund||6.23||7.23|
|Invesco India Credit Risk Fund||4.57||5.17|
While cautioning the investors to invest in credit risk funds, Chetanwala adds: “You should try to limit the allocation of credit funds even though they may have the potential to generate additional returns and it is better to keep the debt portfolio well-diversified. So, you should restrict the allocation up to 10-15 percent of the debt funds’ portfolio in Credit Risk fund only if you are comfortable with taking the additional risk.”
Notwithstanding the high returns, conservative investors are advised to avoid these funds. However, those with moderate to high-risk appetite can invest anywhere between 15-20 percent of their fixed income portfolio in them.