Should you still consider investing in credit risk funds?
2019 was not so good for the credit risk funds. For several months, this category witnessed consistent net outflows, especially due to credit events that took place this year and led to falling in the net asset value (NAV) of some of the funds, holding affected papers. It all started in June 2018, when the IL&FS defaulted its payment on inter-corporate deposits and commercial papers worth Rs 450 crore. This was followed by the two major defaults by DHFL and Essel (Zee) group, which affected HDFC and Kotak mutual funds. Looking at all this, investing in credit risk funds does seem extremely risky.
But how much risk do they hold? Are they even worth investing in? To understand it better, let us look at the performance of the credit risk fund category in the past one year. There is a total of 20 funds in this category, of which 70 per cent gave positive returns in the past one year. The top five funds were from ICICI, IDFC, Kotak, HDFC, and Mahindra asset management company (AMC) with returns of 9.38 per cent, 9.20 per cent, 8.98 per cent, 8.65 per cent, and 7.36 per cent, respectively. Despite major credit events, they managed to generate reasonable returns. These funds rather gave returns better than the risk-free rate, which is 6.5 per cent. However, the remaining 30 per cent of credit risk funds was a complete disaster. The bottom five funds were from BOI AXA, Sundaram, IDBI, UTI, and Invesco India AMC, which, in past one year, generated negative returns of 44.80 per cent, 5.98 per cent, 5.39 per cent, 4.84 per cent and 4.55 per cent, respectively. From the following table, you can understand the key stats of all the funds in this category.
| Funds | AUM (in Rs crore) | 1-Year return (%) | Sharpe | Sortino | Standard Deviation |
| ICICI Pru Credit Risk Fund | 11,706.70 | 9.38 | 6.28 | 14.27 | 1.20 |
| IDFC Credit Risk Fund | 1,494.20 | 9.20 | 4.91 | 10.09 | 1.49 |
| Kotak Credit Risk Fund | 4,979.30 | 8.98 | 5.30 | 11.10 | 1.32 |
| HDFC Credit Risk Debt Fund | 14,569.40 | 8.65 | 4.15 | 7.66 | 1.61 |
| Mahindra Credit Risk Yojana | 151.60 | 7.36 | 3.79 | 7.83 | 1.32 |
| SBI Credit Risk Fund | 5,109.10 | 6.45 | 1.92 | 2.54 | 1.96 |
| DSP Credit Risk Fund | 1,510.80 | 4.41 | 0.32 | 0.39 | 3.10 |
| Axis Credit Risk Fund | 1,300.40 | 4.32 | 0.22 | 0.23 | 4.24 |
| Franklin India Credit Risk Fund | 6,295.70 | 4.15 | 0.17 | 0.22 | 2.15 |
| PGIM India Credit Risk Fund | 379.80 | 3.11 | -0.06 | -0.09 | 8.55 |
| L&T Credit Risk Fund | 1,980.50 | 2.34 | -0.44 | -0.48 | 4.24 |
| Baroda Credit Risk Fund-A | 668.20 | 2.28 | -0.70 | -0.77 | 2.58 |
| Aditya Birla SL Credit Risk Fund | 5,535.00 | 2.17 | -0.41 | -0.45 | 4.97 |
| Nippon India Credit Risk Fund | 5,604.50 | 2.00 | -0.71 | -0.79 | 3.30 |
| Principal Credit Risk Fund | 35.00 | -0.14 | -0.58 | -0.59 | 8.52 |
| Invesco India Credit Risk Fund | 195.90 | -4.55 | -1.21 | -1.22 | 9.41 |
| UTI Credit Risk Fund | 1,596.80 | -4.84 | -1.37 | -1.40 | 8.43 |
| IDBI Credit Risk Fund | 60.40 | -5.39 | -1.28 | -1.32 | 9.87 |
| Sundaram Short Term Credit Risk Fund | 170.10 | -5.98 | -1.24 | -1.25 | 10.85 |
| BOI AXA Credit Risk Fund | 179.80 | -44.80 | -1.95 | -1.96 | 40.84 |
Now the question arises that if you should consider investing in credit risk funds. The answer is yes, you should consider investing in them. Although you need to first assess your risk appetite. Conservative to moderate investors should avoid investing in them. Only moderately aggressive and aggressive investors should consider credit risk funds. Also, it would be prudent to consider investing in them to create wealth over a long period. If you aim to create a corpus for your child’s education, marriage, or save for your retirement, etc., you should avoid investing in them, irrespective of your risk appetite.