Investor flows shift to 'safer' corporate bond funds, say experts

The fears around credit risk funds have prompted mutual fund (MF) investors to shift their allocation towards corporate bond and banking and PSU funds, which tend to invest in relatively less-risky papers. 

Both categories have seen steady flows in recent months. In the current financial year (from April to August), banking and PSU funds have garnered over Rs 15,000 crore of net investor flows, while corporate bonds funds have received about Rs 11,000 crore of flows. 

In the same period, credit risk funds have seen outflows to the tune of Rs 13,782 crore, showed data from Association of Mutual Funds in India. 

Industry experts say that this trend is likely to continue. “Corporate bond funds and banking and PSU funds are seen as safer options. After the IL&FS episode last September, there has been a flight towards safety,” said Kaustubh Belapurkar, director (mutual fund research), Morningstar.

According to regulatory norms, corporate bonds funds are required to invest 80 per cent of assets in AA-plus and above-rated debt instruments. 

Analysts say banking and PSU funds usually invest in A1-plus certificate of deposits of banks and government-owned companies, which are typically AAA-rated. 

However, investors still need to be careful. “There can still be credit risks in these categories. For instance, there are no caps on rating profile in banking and PSU funds,” said Vidya Bala, an independent MF expert. 

Analysts add that there can be instances where banking and PSU funds have taken exposure to bank bonds, which are not necessarily at the upper end of the rating curve.

Experts say exposure to corporate bond funds can also give investors upside of a duration strategy. “Corporate bond funds offer medium duration play, with high-quality credit exposure,” Bala said. 

So, fall in yields and a benign interest-rate scenario can contribute to investor returns in such schemes. 

In one-year period, corporate bond funds have delivered returns of 6.5 per cent, while banking and PSU funds have given returns of 10.5 per cent. On the other hand, credit risk funds have delivered a little less than 1 percentage point in returns.