Is it the right time to invest in credit risk funds?
credit risk funds and liquid funds sit on opposite ends of the risk-return spectrum. Liquid funds are usually used for parking any idle surplus, with safety as a priority, even if it means compromising on returns. Credit risk funds are fancied by yield-hungry investors for the promise of a bigger pay-off.
Many are willing to take on greater risks in pursuit of this return.
However, a quick glance at the performance charts reveals a muddled picture that is not particularly flattering for credit risk funds. Over the past year, liquid funds have fetched an average return of 6.5%, even as credit risk funds have clocked 7%. This is too short a period to allow for comparison of performance.
Over longer time frames, credit risk funds have flexed their muscles, albeit inconsistently. Over the past three years, for instance, credit risk funds have outperformed sharply, delivering an annualised return of 9.8%, compared to liquid funds’ 4.5%. During this period, the credit profile of Indian companies improved sharply, with credit rating upgrades outnumbering the downgrades.
Alekh Yadav, Head of Investment Products, Sanctum Wealth, points out, “Several funds, which had earlier written down underlying bond values amid defaults and downgrades, marked up the prices as credit profile improved.
This gave a boost to fund NAVs.” The credit spreads of AA and lower credit rated instruments over AAA and sovereign bonds also narrowed significantly over this time frame. This reflects in the outperformance of credit risk funds in the past three years.
However, this gap is not as evident over five- and 10-year time horizons. In fact, over the past five years, liquid funds have been on a par with credit risk funds; both categories have averaged
