Credit risk funds once again back on investors' radar, shows data

After witnessing sharp outflows in 2020, credit risk funds are once again back on investor radar.

In 2021, they experienced net inflows of Rs 917 crore, compared to net outflows of Rs 35,710 crore in the preceding year.

The sharp outflows in 2020 came amid a spate of downgrades and defaults in corporate paper, leading to risk aversion. Also, Franklin Templeton Mutual Fund’s decision to wind up six of its schemes led to further panic.

“After a long time, the category has once again started experiencing net positive flows, albeit not high in quantum, which could lead one to conclude that perhaps the category has managed to turn the corner when it comes to outflows,” said Morningstar in its report. 

The net inflows into the category can be also attributed to improved performance of credit risk funds in the last one year, even as yields remain under pressure due to loose monetary policies.

On average, credit risk funds have given returns of around 9.4 per cent in the last one year — the highest among other debt categories. 

Few schemes in the category have managed to give double-digit returns in the past year.

Credit risk funds are debt schemes that take significant exposure (at least 65 per cent) to not-so-highly rated companies ('AA' and below), with the aim to generate higher returns.

According to Morningstar, funds that had the highest net inflows in 2021 were HDFC Credit Risk Debt (Rs 1,858 crore), followed by ICICI Prudential Credit Risk (Rs 1,223 crore) and UTI Credit Risk (Rs 157 crore).

On the other hand, funds that saw the highest outflows include SBI Credit Risk (Rs 550 crore), Nippon India Credit Risk (Rs 259 crore), and Kotak Credit Risk (Rs 81 crore).

Fund managers also say that credit space remains appealing to investors willing to take slightly higher risk in debt funds.

R Sivakumar, head-fixed income at Axis Asset Management Company, in a recent note had stated that “credits remain an attractive play for investors with a three- to five-year investment horizon, as an improving economic cycle and liquidity support assuage credit risk concerns, especially in higher quality names. While we remain selective in our selection and rigorous in our due diligence, we believe the current environment is conducive to credit exposure”.