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Increase Allocation To Credit Risk Funds To Tap Extra Return Potential

Increase Allocation To Credit Risk Funds To Tap Extra Return Potential


Daxesh Kothari
MD & CEO, Ashutosh Financial Services Pvt Ltd

The fixed income mutual fund space offers a bevy of products to suit a wide variety of investor needs. While most of the debt MF categories are for the risk-averse investors, there exists one product which can be worthwhile for investors who are willing to take marginally more risk. In return, they can potentially get juicy extra returns that beat all the debt MF categories. Welcome to the world of credit risk funds. Doing a tight-rope walk between risk and gain, credit risk funds are known as optimizers that take advantage of credit opportunities that come up in the fixed income space. Given credit risk fund's inherent advantages, suitable investors can increase their allocation to this product to give a definitive edge to the debt component of their portfolio. Read on to know more. 

Defining credit risk

Credit risk funds generate income through investing predominantly in AA and below rated corporate bonds. They do this while maintaining the optimum balance of yield, safety and liquidity. Suitable for investors who are looking at medium term savings, credit risk funds essentially require the investor to remain invested for 3-4 years. This not only gives the investors the advantage of tax-efficiency in terms of using the long term capital gain tax structure for debt funds, but also helps the fund manager to be patient with credit risk bets. While maintaining reasonable liquidity, credit risk funds target high accrual by taking on a marginally higher credit risk. Over the years, credit risk fund as a category has emerged as a key category with over `70,000 crore assets. 

Investment strategy

Credit risk funds scout for opportunities to maximize portfolio yield. This is done by primarily investing in AA and below rated corporate bonds. The funds invest predominantly in corporate bonds, which offer good opportunity to leverage credit risk. By choosing a diversified portfolio that is positioned for growth 

and stability, credit risks funds seek to provide regular income as well as capital appreciation. To efficiently manage the risks, these fixed income mutual funds avoid concentrated portfolios and also cap corporate group level exposure. Apart from the core strategy, credit risk funds may also seek to capitalize on opportunity of potential credit rating upgrades from time to time, adding extra alpha. This is because relatively low rated bonds usually offer higher coupon rate and if their ratings are upgraded, the prices of such bonds jump.

Read macros to use micros

Fund managers overseeing credit risk funds evaluate the prevalent microeconomic and macroeconomics conditions. This is important because they have to form an opinion on the credit scene. They decide on exposure to sectors that are not performing well in the current market. The quality of the investment manager of a credit risk fund is quite critical. Investors choosing credit risk funds must give proper consideration on the past record of managers, because only the highly skilled ones can deliver consistent performance during multiple credit cycles.

Is it for you?

If you can spare more than 36 months and have a higher risk appetite for credit, credit risk funds are for you. Take into account your time horizon and financial goals before investing, as the maturity profile of the credit risk mutual fund must coincide with your time horizon. Such an approach will align your investments and also act as a handy safeguard to some extent. Entrust your investments to a credit risk fund with a highly dependable track record across interest rate and credit rating cycles. With potential to deliver outsized gains for the marginal credit risk they take, these funds should find increased allocation in portfolios of investors who have the ability to tolerate risk. 

For more information contact : Daxesh Kothari, MD & CEO, Ashutosh Financial Services Pvt Ltd  Email:

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