Most debt funds, except for credit risk funds, have got their mojo back after the rate hikes, a report by Business Standard stated. As per the report, the yield-to-maturity (YTM) of these high-risk schemes is still 8 percent or below —slightly better than the YTM (7-7.25 percent) of safer fund categories like corporate bond funds.
Credit risk funds command around a 1 percent expense ratio, against a modest 0.3 percent for corporate bond funds, noted the brokerage. As a result, the net yield (YTM minus expense ratio) of both scheme categories is now nearly similar at around 7 percent, leaving little incentive for investors to take higher risks, it pointed out.
The BS report informed that credit risk funds have been spurned by investors since the pandemic breakout. In 2020, these schemes witnessed net outflows of ₹35,710 crore amid a string of downgrades and defaults in corporate papers, it noted.
As a result, the assets under management (AUM) for this category plunged to ₹28,500 crore in December 2020 (from ₹62,000 crore in February 2020). As of August this year, credit risk funds had an AUM of ₹26,260 crore — a fraction of pre-pandemic levels. The assets have shrunk as returns have failed to keep pace with expectations, the BS report stated.
According to the Value Research data, the three-year return of these schemes stands at 6.37 percent compound annual growth rate (CAGR), while the one-year return is 6.9 percent, with 10 of the 16 schemes delivering sub-6 percent, BS pointed out.
Experts informed that multiple factors behind the poor performance of credit risk funds in the past few years include risk aversion among fund managers, unattractive spreads, and higher fund management fees.
However, some experts believe this is not the end of the road for credit risk funds, added BS.
Suresh Soni, chief executive officer of Baroda BNP Paribas MF, believes that a lot is going in favour of credit risk funds and debt funds and returns will improve soon enough, said the report.
Meanwhile, Joydeep Sen, corporate trainer and author, further stated that net YTM will improve in the future and credit risk funds can again become suitable for certain investors.