Credit risk funds: Evaluate if incremental return justifies the risk

Credit risk funds have delivered a category average return of 9.30 per cent over the past year, which makes them one of the top-performing debt fund categories. However, investors must assess whether the additional return justifies the higher risk these funds carry.  

Key return drivers 

Returns have largely stemmed from accrual income and credit spreads. “The larger part of the returns in credit risk funds were generated through accrual from the underlying securities by capturing the spread available between high grade and credit securities,” says Sushil Budhia, senior fund manager-fixed-income, Nippon India Mutual Fund. These funds invest at least 65