Things to remember before investing in credit risk funds

Credit risk funds came into limelight right from the IL & FS fiasco, which was then followed by DHFL, ZEE Ltd and Yes Bank. And this time, Franklin AMC was forced to close six funds due to panic redemptions. Though fundamentally, there was nothing wrong with those funds but high redemptions led the fund houses to close the funds. This event has made the investors to question on other credit risk funds as well. Hence, it is important to understand a few things before you invest in credit risk funds. In this article, we have discussed some of the major things that you should keep in mind while investing in credit risk funds.

Risk

This is the biggest factor that would help you make decision whether or not to invest in them. If you are someone who wishes to achieve your financial goals or who is conservative to moderate risk taker, then it makes complete sense to avoid investing in credit risk funds. The reason for the same is the risk that is involved in it. These funds usually take credit risk to generate higher returns. Hence, do not get lured by its returns. Also, understand the risk that is being undertaken.

Yield to maturity

Yield to maturity or as popularly known as YTM, is one of the things that you should consider before selecting credit risk funds. Avoid any such funds that are three to five per cent away from its category average. Those having YTM higher than its category average will always be taking higher risk than that of the category.

Credit ratings

Credit ratings would fairly guide you in respect of quality of papers that these funds hold. On an average, 42 per cent of the funds have been allocated AA rated paper. However, there are a few funds such as, Nippon India Credit Risk Fund that hold majority of A-rated, below A-rated and unrated papers. This makes it a very risky investment proposition. Even its YTM stands at 13.37 per cent, which is the highest among credit risk funds.

Average maturity

Average maturity helps you to understand when majority of the papers held by the fund is going to mature. On an average, the average maturity period for credit risk funds is 2.12 years. This means that if you need money in two or more years then only, invest in this fund. If your investment horizon is less than that then, investing in it makes no sense.

Portfolio

This is one of the most important factors while selecting credit risk fund. It is important to know what kind of papers, the fund is holding, along with, to which organisation do they belong. This will not just help you to understand on which sector they are overweight but also, let you to know what kind of instruments they are dealing into.