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Credit-risk funds likely to give up to 9% returns: Analysts

High differential in spreads between rated bonds & repo makes funds suitable for investors with moderate risk appetite.

, ET Bureau|
Updated: May 30, 2019, 04.35 PM IST
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Investors with an appetite for moderate risks and investment time-frame of three years could allocate some portion of their debt portfolio to credit-risk funds, which could yield 8-9% annualised returns.

Fund managers say it is a good opportunity to invest in such funds due to the high differential in spreads between rated bonds and the repo. Credit-risk funds are debt funds that have at least 65% investments in less than AA-rated paper.

“Spreads between AAA and AA paper is about 150 basis points, the highest since the global financial crisis,” said R Sivakumar, head of fixed income and products at Axis Mutual Fund With inflation remaining stable and within the RBI mandate of 4% (plus or minus 2%), fund managers believe the central bank’s policy stance might tilt toward growth.

Analysts believe the RBI and the government will announce measures to bring liquidity to the neutral level, aiding in transmission of the latest policy decision that had lowered rates. Fiscal rectitude and range-bound oil prices will likely keep yields on long bonds stable at current levels.

Investors had shunned this category of funds after defaults by IL&FS, which triggered a liquidity crunch in the broader financial system.

Investors evaluating credit-risk debt portfolios should look deeper

Aum as on April 30, 2019

into the constituent companies.

“Companies that are part of the portfolio should have visible cash flows. The debt service ratio should be 1.2 on a conservative basis,” said Mahendra Jajoo, CIO (fixed income), Mirae Mutual Fund.

Investors could go for funds where the portfolio is spread across a large number of papers.

“Go for funds that have a higher number of securities in the portfolio so that the risk is well spread,” said Harshvardhan Roongta of Roongta Securities.

Simply put, for a fund holding 20 securities with 5% holding in each security, an investor stands to lose 5% if one company in the portfolio is under stress. However, if a fund has 50 securities and one goes bad, the loss is only 2%.

Franklin India Credit Risk Fund, the best performing in the category with assets of ₹7,229 crore and 1-year return of 8.76%, has 107 securities in its portfolio. ICICI Credit Risk fund, with assets of ₹11,156 crore and 1-year return of 7.74%, has 113 securities in its portfolio.

Although returns from creditrisk funds seem high, wealth managers believe investors should not chase returns in debt funds and only allocate a small portion of their portfolio to such schemes.

“Debt funds/ bond funds are not wealth generating products. Do not expect and try to earn fabulous returns from this product. They are meant to provide returns around what you earn similar to bank deposits, subject to market risks and in some cases have better taxability over fixed deposits,” said Arvind Chari, head fixed income at Quantum Advisors.

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