Yield-hungry HNIs chase debt funds with low-rated holdings

A debt mutual fund category that invests in securities with lower ratings is gaining popularity among affluent investors. With interest rates rising and companies’ credit ratings improving, credit risk funds, formerly credit opportunities, is beginning to see inflows. Wealth advisors said investors could earn 9-10 per cent annual returns from this category.

Credit risk funds invest at least 65 per cent of its corpus in corporate debt instruments rated AA or lower. They invest in lower rated papers than corporate bond funds.

After the recent rise in interest rates — RBI raised repo rates by 25 basis points — bond yields have moved up, which has pushed the yield to maturity (YTM) of credit risk schemes.


“During the last year, corporates have reduced debt and derisked their balance sheets. The business cycle has turned and there is an uptick in revenues and improved outlook for cyclical business,” said Nitish Sikand, Fund Manager (Fixed Income), Invesco Mutual Fund.

The total gross return expected from this category, if held till maturity, is 9.2-11.4 per cent. In comparison, bank fixed deposits return 7% before taxes.

For example, the yield to maturity (YTM) of BOI AXA Credit Risk Fund has moved up to 11.42 per cent, Franklin India Credit Risk Fund is 10.84%, while that of Aditya Birla Sunlife Credit Risk Fund is 10.73 per cent.

The number of upgrades in ratings have outnumbered downgrades of late. “CRISIL’s number of upgrades versus downgrades, which printed at 1.45 times in the second half of fiscal 2018, continues to reflect the improvement in the good loan-book which shows the economy is on a growth path,”said Rupesh Bhansali, head (Distribution), GEPL Capital.

As per CRISIL, there were 1,402 upgrades to 839 downgrades in financial year 2017-18.

Bhansali believes that investors with a higher risk appetite and ability to stay put for three years could consider investing in credit risk funds.

Vishal Dhawan, Chief Financial Planner, Plan Ahead Wealth Advisors said “While investors can earn an extra 1-1.5 per cent in these funds compared to a AAA-rated portfolio, they need to understand that it comes with that extra risk.”