Credit-risk funds catch a break in May after 52 months of outflows

The debt fund category attracted over ₹1,300 crore in April and May combined, ending more than four years of continuous investor withdrawals

After 52 months of uninterrupted outflows and over ₹15,000 crore in investor withdrawals, credit risk funds are showing the first signs of a comeback. The only debt mutual fund category allowed to invest heavily in lower-rated papers attracted inflows in both April and May, snapping a more than four-year streak of monthly outflows.

 

The category garnered ₹1,318 crore in April — the highest monthly inflow since at least April 2019, when the Association of Mutual Funds in India (Amfi) started reporting category-wise flow data. Inflows continued in May, albeit at a slower pace, with investors adding ₹49 crore.

 

"Credit risk funds saw marginal inflows last month, extending the nascent recovery observed in April. However, flows remain muted and selective, reflecting continued investor preference for higher-quality exposures despite improving system liquidity. Notably, credit risk funds were the only category to see inflows in May, with the remaining 15 out of 16 debt categories recording net outflows during the month," said Nehal Meshram, senior analyst, Morningstar Investment Research India.

 

Credit risk funds, which were among the largest debt mutual fund categories until early 2019 with nearly ₹80,000 crore under management, have since witnessed continuous outflows. The assets under management (AUM) now stand at around ₹21,000 crore.

 

The category started losing traction after 2018 as the IL&FS crisis, along with defaults by issuers such as DHFL and Yes Bank, led to losses in multiple schemes. The liquidity crunch during the Covid-19 pandemic in 2020 further accelerated the investor exodus. Investors pulled out over ₹31,000 crore from credit risk funds during the March-June 2020 period.

 

The episodes also prompted fund managers to adopt a more cautious approach, with many reducing exposure to lower-rated papers and shifting towards higher-quality issuers, diluting one of the category's key attractions.

 

The inflows have started to return as credit risk funds have delivered strong performance in recent years. The category has consistently been among the best-performing debt fund segments, with no major defaults reported across schemes. The average one-year return currently stands at 8.5 per cent despite pressure from rising yields. Average annualised three-year and five-year returns are around 10 per cent, according to Value Research data.

 

Experts said these schemes can be considered as default risks remain relatively low.

 

"This is an opportune time to revisit credit risk funds. Corporate health has improved significantly over the past few years, and the defaults that rattled the market in 2018 and 2019 are now part of history. Credit strategies continue to find favour among high net-worth individuals (HNIs) through portfolio management services (PMS) and alternative investment fund (AIF) vehicles, and a similar reassessment may now be underway among mutual fund investors," said Joydeep Sen, corporate trainer (financial markets) and author.