Is it time for investors to consider credit risk funds? Experts offer their opinions
Credit risk funds have had a challenging time since late 2018, when they were hit hard by payment defaults. In 2020, the Franklin Templeton scandal exacerbated the dilemma. Fears of more bankruptcies prompted investors to exit credit risk funds. SEBI, the regulator, and fund managers, on the other hand, had their act together. Portfolios have been de-risked and brought back into investor contention in recent years. Smart investors recognized this and chose to stay put. Last year, credit risk funds beat all other debt funds on average during a period when interest rates were held low. With inflation hovering around 6%, credit risk is the only asset class that has outperformed inflation. Investing in credit risk funds, on the other hand, is a high-risk approach.
Industry professionals share their thoughts on how investors should navigate credit risk funds in the current climate.
R Sivakumar, Head fixed-income, Axis MF
We are in a rising rate environment globally, and domestic yields have firmed up in the previous year or so. Credits in investment banking companies tend to outperform in such an environment for a variety of reasons. One is that credits already have higher yields than a comparable maturity debt instrument on the AAA or G-Sec yield curve. The second point is that the current macroeconomic situation, which allows rates to rise, is normally favourable to economic growth. In such circumstances, the credit approach tends to perform better. In recent quarters, we have seen an improvement in growth, with the RBI and government expecting growth of close to 8% in the 2018 fiscal year. As a result, positive financial results from corporations are expected, which are, once again, supportive of credit strategies.
Credit funds, on the whole, have a shorter duration than other AAA-rated portfolios. As a result, in a rising interest rate environment, the duration impact is lower to begin with. And, within that, in a rising interest rate environment, G-Sec and AAA-rated yields often climb more than credit yields, implying that spreads contract. Lowergraded bonds, such as those rated single A, are typically valued in absolute terms or in comparison to comparable single A or AA-rated instruments rather than in comparison to G-Secs. As a result, they frequently do not move in lockstep with G-
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