In the world of debt funds, where safety of capital is the biggest priority, does a scheme like credit risk fund make sense? Why should an investor who is open to taking risks opt for a credit risk fund instead of an equity fund?
As an MFD, it is likely that these questions would have cropped up in your mind at some point in time. We spoke to several experts to find the answers and what we gathered is that scenarios do exist where credit risk funds make perfect sense.
"There are some clients who are averse to equities but want higher returns. If they have the risk taking capacity and can invest for the long term then credit risk funds can be an option," said Viral Bhatt of Money Mantra.
Vishal Dhawan of Plan Ahead Wealth Advisors said if the client is aware of the risks, he can allocate a small allocation in credit risk funds. "If an investor is well informed about the risks, 10-20% allocation can be made towards credit risk funds," he said.
Ranjit Dani, Founder and Director of Think Consultants has a different take on this. He said that comparison of a debt fund with equity schemes is not justified. "Comparing it to equity is completely unfair. Unlike debt schemes, equity funds can give you negative returns for prolonged periods. From 2008-2013, the 5-year equity return was zero," he said.
"In credit risk funds, one or two securities can get marked down but the rest will deliver. And the returns might still remain in the positive territory. The new norms post the freezing of Franklin Templeton's six schemes in 2020 has made credit risk funds much safer. However, on the flip side, it’s no longer possible for fund managers to deliver the kind of returns we were used to seeing in the past," he added.
Rahul Jain, Senior VP Research at International Money Matters believes that credit risk fund has lost its sheen in the past year or so. He said that tighter regulations coupled with fund managers' aversion to risks has resulted in subdued returns in the recent past. Moreover, the fall in returns has led to questions over high fund management expenses,” he said.
"In such a case, people tend to connect the dots. Investors ask as to why they should take higher risks when the returns aren't that great," he added.
Credit risk funds have delivered 9% returns in the last one year (annualised as on January 20, 2022). The return is the highest in the debt space. However, investors have been pulling out money from the scheme category since March 2020. The AUM, which was at Rs.55,381 crore in March 2020, almost halved to Rs.28,356 crore by March 2021. The figure has almost remained constant since then. As of December 2021, credit risk funds were managing assets worth Rs. 28,365 crore, as per AMFI data.
