Tipping Point: Should you invest in credit risk funds?

Return from the credit risk fund category has declined to 5.06 per cent over the past year. This is much lower than their three-year category average return of 7.25 per cent and five-year average of 8.31 per cent. The asset-under management of this category has also declined by 10 per cent from Rs 91,031 crore in August 2018 to Rs 81,951 crore at the end of February 2019.
 

 

No doubt the outflows are also correlated to the defaults by IL&FS and its subsidiaries and the subsequent liquidity squeeze. These events brought investors face-to-face with credit risk. Investors who have just moved from fixed deposits to debt funds should avoid credit risk funds altogether. For most investors, 80-85 per cent of their investments in debt funds should be in funds that do not take either credit or duration risk. Investors should take limited exposure in credit risk funds.