IL&FS mess shows why debt fund investors should watch out for credit risk

A large part of the blame for the episode, say experts, lies with the rating agencies, who should have started downgrading IL&FS and its affiliates earlier

Besides duration, credit is the other key risk that investors bear when they invest in debt funds. In the past, too, debt funds have suffered due to payment defaults or credit downgrades in the papers of Amtek Auto, Ballarpur Industries, Jindal Steel and Power, and so on. The recent multiple-notch downgrade of the papers of IL&FS (from AAA on August 6 to D by September 17) and its group entities by ICRA should jolt investors into paying greater attention to credit risk in debt fund portfolios. 

The silver lining for investors: Twelve fund houses and 32 funds have exposure to