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HOW TO INVEST IN CREDIT RISK FUNDS ?

Posted By: Admin

Investors want a return on their investments. We know that, the best returns are with Equity Mutual Funds, some of the equity funds in the last 12 months have generated even 100% returns , while most have generated about 50-60% returns with the Sensex moving from a record low in March 2020 ie 28000 pts to a record high ie 58,000 as at mid September. Is it for everyone and their aunts.. unfortunately Equity MF is a great place to invest, no doubt, but one must have the following  :

  1. One must look for returns in the long term ideally 5 years + to may be 10 years ;
  2. One must be comfortable to wait out any bad periods in between the above time ; 

 

If you are not having that kind of an investment tenure say 5 year + or you are uncomfortable with volatility, then you need to look at Debt Funds as a category. Wherein the risks will be lesser than equity but so too will be the returns. 

 

One of the categories of Debt funds for investors is Credit Risk Funds, these are the highest yielding debt mutual funds. The reason they provide a high yield is that  they take a few risk with lower safety  investments which tend to provide a higher yield.  

Features of Credit Risk Funds:

Low credit rating offers higher interest rate. 

These funds have more liquidity risks. 

Credit risk funds have lower interest rate risks.

How it is works?

It maintains the average credit quality of the fund by investing in a range of credit papers including lower credit rated papers that may provide a higher return.  Usually credit risk funds offer 1.50- 2.00% higher returns than risk free debt investments. The fund manager’s job is to take risks but deliver a higher return. Occasionally their risks don’t pay off the securities may turn default in which case the investor will suffer. However unlike an FD, his full money will not be at risk, more like the returns will get impacted for a period of time. 

Conclusion:

A recent study revealed that most investors who keep money in the savings account are earning NEGATIVE INTEREST, ie the rate of inflation is higher than the interest rate and therefore money if kept in savings  in the long term as such would tend to diminish and eventually lose relevance. So investors need to be cognizant to move them to a variety of investments that generate a higher return. Credit risk can be small allocation with one’s debt Mutual Fund category to generate a slightly higher return overall. 

We would advise you not to invest more than 10 % of your portfolio in a credit risk fund, and over of all your money no more than that. You need to remember that investing these funds have a medium to high risk tolerance.

 

Indicative List of  Credit Risk funds:

 

S.No

Scheme Name

1 Yr Return

3 Yr Return

5 Yrs Return

1

DSP Credit Risk Fund Reg -Growth

4.61%

3.59%

4.30%

2

Invesco Credit Risk Fund Reg – G

5.17%

3.74%

4.80%

3

HDFC Credit Risk Fund Reg – G

10.68%

9.92%

8.67%

4

AXIS Credit Risk Fund Reg – G

8.77%

7.89%

7.75%

5

Nippon India Credit Risk Fund Reg – G

16.36%

3.84%

5.29%

Sangeetha, Sherpani

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