Should you invest in credit risk fund?

Credit risk funds which invest in low-rated instruments are being admired by the investors due to the fact that they have the potential to earn double-digit returns. So, what are these credit risk funds? According to the SEBI’s (Securities and Exchange Board of India’s) circular on re-categorization, credit funds are those who should have minimum 65 per cent of the total assets invested in below highest rated instruments. This means that credit risk funds invest in instruments that are rated below AAA rating. This, in turn, increases the overall risk of the portfolio and that is the reason they have the potential to generate high returns.

So, what kind of CAGR (Compounded Annual Growth Rate) it generated over the period of 1-year, 3-year and 5-year? In 1-year, 3-year and 5-year it generated an average CAGR of 5.14 per cent, 7.31 per cent and 8.32 per cent, respectively. The average maturity is a little above 2 years, while the modified duration being 1.5 years this means that your minimum time horizon for investment in credit risk funds must be around 1.5 years to 2 years. The average yield to maturity is 10.41 per cent. Higher yield to maturity, higher is the returns and higher is the risk.

Keeping these factors in mind, the question is who should invest in credit risk funds? Conservative risk takers must strictly avoid investing in credit risk fund, rather they may opt to invest in corporate bond funds. Moderate investors must not have exposure of more than 10 to 20 per cent in credit risk funds. However, aggressive risk taker should invest in them with a time horizon of more than 2 to 3 years.