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What Are Credit Risk Funds? Should You Invest After ILFS Fiasco?

Roshni Agarwal

These funds have gathered the attention in the wake of recent credit rating downgrades and troubled IL&FS case. Before we go ahead with the discussion as to whether or not this category of fund is suited for you or not. We will stress first on the new norms specified for the fund category post SEBI's recategorization and rationalization of mutual funds.

And before we go further deeper, we will simply state what a credit risk fund is? This fund type is exposed to a credit risk wherein the payment can be defaulted at by the company i.e. there exists a chance of default that needs to be discounted by the investor.

Now furthermore, as per the June 2018, norm specification, few of the stated guidelines for the fund type are:

1. The name should specify the risk such that investors are sufficiently aware about what they are getting into.

2. Also, these funds invest 65% of the corpus in instruments that have a rating of AA or less. So, the chances of a credit risk threat do loom for the investors during the investment tenure.

So in a case when you have a good enough penchant for high risk, you should still be paying heed to these factors, before actually taking a bet on credit risk funds and these include:

1. Notably for higher risk there is provided higher return to the investor and in respect of the same, while choosing a credit risk fund category, investors should take note of the pedigree of the sponsor or AMC of the fund. Their creditworthiness in dealing with credit exposure and well as their due diligence carrying out process.

2. Also, credit fund with a more diversified portfolio should be chosen over a concentrated one as a more well spread portfolio reduces the risk to a great extent.

3. AMCs offering similar fund type should be studied in respect of the credit quality as well as running yield. For this investors can give heed to or compare credit rating composition as well as YTM or yield to maturity of different funds in the category.

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