FIXED INCOME: Credit risk funds – Vet them carefully

financialexpress.com:

As the NUMBER of investment-grade bond issuances has been on a steady rise indicating overall buoyancy in the credit segment, individuals are looking at credit risk funds for higher returns. With the investment cycle picking up steam and much of the private capex yet to be committed, one can expect a series of high-quality issuances in the sub-AAA category. However, investors must be cautious as returns in isolation may not be the best metric to go by.

Credit risk funds are debt funds that invest at least 65% of the portfolio in bonds rated AA and below. Investors who want to generate additional returns along with some risk opt for such funds. Even liquidity is an issue as the secondary market for lower rated debt securities has not yet developed in India.

Nirav Karkera, head, Research, Fisdom, says an investment into a credit risk fund must be a subject matter of one’s investment profile and risk appetite. “However, for those with suitable attributes, now could be a good time to allocate selectively towards credit risk funds. It is imperative to understand the risk management framework, fund management style and risks associated with every issuance held in the portfolio.”

Similarly, Abhishek Banerjee, founder & CEO, Lotusdew Wealth & Investment Advisors, says for an aggressive debt investor, it is probably better to bet on interest rate view from monetary policy instead of betting on lower rated credit. “You try to earn a yield for potential complete loss of principal and being aggressive here seldom pays unless the yield is quite high,” he says.

What to look for

Before investing in credit risk funds, investors must look at the fund manager’s past track record of managing credit risks, identifying high quality credit