Credit risk funds have come back from the turbulent phase in 2018-19. The schemes have been giving decent returns in the last few years and at the moment the category is doing better than its counterparts in the debt fund space. Debt fund managers said that it is the right time to invest in credit risk funds because the valuations and outlook are very positive.
“The good news is that credit funds are the best performing instruments, even in 3 year and 5 year. When you look back today, it doesn’t look all that bad. Today things are very different. Yields are much lower and it is a very interesting opportunity,” said R Sivakumar, Head-Fixed Income, Axis Mutual Fund.
The fund managers were discussing the outlook and risks involved with credit risk funds. They believed that the new regulations have made the credit risk funds less risky and better for retail investors.
“In 2013, an interest rate shock came out of nowhere when most retail investors were invested in long duration funds. Then came 2018-2019. It brought out the credit risks in portfolios. Today the system is far better. From the mutual fund perspective, there are a lot of changes and regulations which enables you to understand risk better. All these regulations were a fall out of what happened in 2018-19. As the rate cycle has turned, the liquidity has started to unwind. The changes have happened but there is a lot of improvement needed,” said Rajeev Radhakrishnan, Head-Fixed Income, SBI Mutual Fund.
R Sivakumar said that because of SEBI regulation and mandate on liquidity in credit risk products, now funds have to own some g-sec in the portfolio. This makes the product stabler and the managers are also not taking extra risk.
Even with the good performance, many investors are not very comfortable getting into the credit risk funds because of the events that played out in 2018-19. Fund managers said that the scenario has changed, but investors still need to be cautious with the risk involved in these schemes.
“If I look back at 2018, investors were chasing YTMs and risk was not being taken seriously. To convince investors that you have to look at the risk involved was getting very difficult and then we saw how much impact it had. 2020 was the best time to invest in AA assets, but retail investors were afraid and sold the assets. The difference between equity and credit risk portfolio is that whenever the risk comes in credit, it comes big. It might not stay volatile. It is very important for investors to evaluate risk and understand how much risk they want to take for extra returns,” said Manish Banthia, Fund manager- fixed income, ICICI Prudential Mutual Fund.