Credit-risk funds invest at least 65% of their total investment in less than AA-rated paper to generate superior returns.
Given the fact that the structure of the fund is to take higher credit risk by investing in lower-rated papers, such schemes are expected to give 2-3% higher returns compared to less risky debt funds like liquid funds and overnight funds.
However, the recent series of credit events in some of the debt papers affected credit risk funds. Data compiled by Valueresearch.com shows that returns of by credit risk funds have declined for two straight years. The returns of this category were at 10.22% in 2016, 7.17% in 2017 and 5.07% in 2018.
This has raised questions from various quarters of the industry on whether the risk in credit risk funds is worth taking. At the BSE Star MF app launch event held recently in Mumbai, industry CEOs were deliberating on the issue.
Sunil Subramaniam, CEO Sundaram MF said that IFAs should not sell credit risk products to their customers as most investors put the capital preservation money in debt funds.
He further argued that in credit funds, there is unlimited risk limited reward. “So why put your money in something where the upside is limited but the downside is unlimited. The customer has absolute safety in bank deposits. He does not want to give up the safety but he expects a better return. IFAs should better put their clients’ money in liquid funds, which are relatively safer,” he said.
Valueresearch.com data further shows that liquid funds outperformed credit risk funds last fiscal. The average return of liquid funds stood at 6.88% in 2018, sharply higher than 5.07% of credit-risk funds.
Neeraj Choksi, Joint MD, NJ India also struck a similar chord. “The kind of risk you take in credit funds is hardly commensurate with the returns,” he said.
However, Kailash Kulkarni, CEO, L&T MF has a different opinion and asked advisors to take their decision based on the risk appetite of clients.
Radhika Gupta, CEO, Edelweiss MF said that advisors could do two things. One, they could select funds that do not take credit risks. Two, if your clients still want to take credit risks, recommend them to put a small portion of their investible corpus in such funds and tell them not to panic. “Let a crisis teach you how to manage risk better, but do not stop taking risk again because you had a crisis,” she added.
Nilesh Shah, MD, Kotak Mahindra MF said that there is a disconnect between investors’ perception of credit risk funds and fund houses’ way of communicating the risk. Speaking about the controversy surrounding Kotak Mahindra AMC extending its payout for one of its FMP plans, Shah said, “We probably did not convey to investors as much about the credit risk or investors thought that credit risk funds are free lunch. You will get 1-2% extra return without any volatility.”
Swarup Mohanty, CEO, Mirae MF said that fund houses should write off such securities even if it leads to a sharp decline in NAV or AUM.
