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| Capitalstars Investment Advisor |
The category has been witnessing consistent outflows for several months now, owing to a series of defaults and downgrades that shook the NBFC space.
The credit risk mutual fund category has earned a bad name in 2019. The category has been witnessing consistent outflows for several months now, owing to a series of defaults and downgrades that shook the NBFC space.
The assets managed by the category was down by 20% since the financial year beginning, to Rs 63,754 crore in November. However, three fund houses have managed to grow their assets thanks to their sound performance and effective risk management system.
ICICI Prudential Credit Risk Fund, the second-largest fund in the category managing assets worth Rs 11,707 crore, has seen a growth of 3.09% in its total assets in the last year. The scheme is topping the charts in 2019 with 9.30% returns. Kotak Credit Risk Fund, the seventh-largest fund, has grown its assets base by 1.07% and has given 8.50% returns in the year so far. IDFC Credit Risk Fund, the 10th largest fund, has swollen by 19.85% and is the second-best performer in the category with 9.10% returns YTD.
Let’s revisit some historical events. The first signs of trouble emerged with IL&FS defaulting on its payment on inter-corporate deposits and commercial papers worth Rs 450 crore in June 2018. Then there were other two major defaults by DHFL and Essel Group (Zee) which hit HDFC Mutual Fund and Kotak Mutual Fund – two of the prominent names in the fund management space- off-guard.
HDFC MF gave its investors the option to roll over by another year or to opt for partial redemption on maturity. Kotak MF unitholders were partially paid on maturity with a promise that the remaining amount will be paid as and when the due from Essel group is recovered. In the case of DHFL, which defaulted on interest payments, fund houses opted to adopt the mark-down route.
HDFC Credit Risk Debt Fund, the largest fund in the category holding assets worth Rs 14,569 crore, has lost 15% of its assets since October 2018. But the scheme managed to give 8.63% returns in 2019 so far.
Data throws another interesting point where BOI AXA Credit Risk Fund, the category topper in 2016 and 2017 with 11.22% and 9.32%, became the worst performer this year with -44% returns. The scheme's assets dropped by 82% in the last year from Rs 1,017 crore to Rs 180 crore. This conveys why you should never fall for the category toppers without looking at their portfolio, strategy, and risk involved.
Key learning from credit events
The series of credit events taught investors to focus on risk management and portfolio diversification in debt funds. It has also brought into investor’s focus that debt funds too can be volatile. Also, when investing in credit risk funds investors should realize has rating upgrades and downgrades is a part and parcel of credit investments. The other major learning has been that chasing higher YTMs could lead to trouble.
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