Year-End Special: Credit risk funds stage a comeback in 2022

Credit risk funds, which have lost money and reputation in the last few years, are among the top three on the YTD return charts of 2022 with 13.39%. In 2022, several mutual fund managers and advisors have advocated the case of credit risk funds for aggressive debt investors.

These schemes were offering double-digit returns at a time when all other debt mutual fund categories were down in negative because of the rising interest rates. The category has not only beaten its peers in the debt side, but also matched ahead of many equity fund categories in 2022. Mutual fund managers spoke about how the last quarter of 2022 was a great time to start investing in credit risk funds.

Some of the schemes saw inflated returns because of the repayments from several papers that had defaulted in the past few years. For example, BOI AXA Credit Risk Fund, one of the most hit schemes by the defaults of 2019, topped the return charts with 143% returns in one year. The uptick in the scheme was due to recovery from two companies- Sintex BAPL and Amanta Healthcare- which were written down earlier.


However, not all credit risk funds were offering big returns on the back of repayments. Five schemes from the category offered more than 5% returns in one year. Here’s a look at the toppers:

Scheme name	One-year returns
BOI AXA Credit Risk Fund	143%
DSP Credit Risk Fund	10.11%
ABSL Credit Risk Fund	8.04%
ICICI Pru Credit Risk Fund	5.73%
Baroda BNP Paribas Credit Risk Fund	5.55%

Source: Value research

However, even after all this, the category is yet to win back the trust of investors. The investors who burnt their hands in these funds in the credit crisis of 2018-2019, are still unsure about these funds. The AUM data from AMFI shows that in the first quarter of 2022, credit risk funds saw an outflow of Rs 983.55 crore which rose to an outflow of Rs 1,495.14 crore in the second quarter. This outflow number came down marginally to Rs 793.01 crore in the third quarter. The category continued to see continuous outflows worth Rs 407.85 crore and Rs 204.11 crore in the months of October and November.

Mutual fund advisors say that a small allocation to credit risk funds is okay for aggressive debt investors. With SEBI’s many new rules, the debt funds are now safer. However, the risk of defaults and credit risk is high in this category and hence investors should be cautious.