Credit risk funds report positive flows in January as economy recovers

Debt schemes take significant exposure in not-so-highly rated companies and had lost their appeal after April 2019

Credit risk schemes in January recorded their first month of positive flows since at least April 2019, when an industry association started publishing data for various sub-categories of mutual fund schemes.

Credit risk funds saw net inflows of Rs 366 crore in January 2021, indicating that investors were willing for the product that became unpopular because of the collapse of IL&FS in 2019 and Franklin Templeton Mutual Fund discontinuing six schemes last year.

Credit risk funds are debt schemes that take significant exposure (at least 65 per cent) to not-so-highly rated companies (AA and below) with an aim to generate higher returns.

Market players said investors are now looking at these products as the real rates on bank fixed-deposits and top-quality bonds have turned negative. Investors reckon that a recovering economy will help alleviate stress.

“Overall credit market has seen significant stress in the last two and a half years due to the collapse of IL&FS, weak economic growth and tight monetary policy. But RBI started easing monetary policy from 2019 and we are seeing benefits coming to the corporate sector now. I think given the scenario there is an opportunity for the investors to start participating in the non-AAA rated papers,” said R Sivakumar, head fixed income at Axis Mutual Fund.

The data from Association of Mutual Funds in India (Amfi) shows that between April and December last year, credit risk funds saw net redemption of Rs 28,289 crore, with April witnessing net redemptions of Rs 19,238.98 crore.

 

“The net outflows from the category have been showing signs of moderation over the last few months which eventually resulted in net inflow this month. This is an important development as it shows that investors are gradually gaining their risk appetite back, which was severely impacted after the debt crises during March – May period last year,” said Himanshu Srivastava, associate director--manager research, Morningstar India.

Credit risk funds giving returns in the range between 5 per cent and 10 per cent per cent in the last one year. Market players say such returns will draw interest, as returns in other debt categories is even lower.

“Low rates on bank FDs and AAA-rated corporate bonds have been below inflation rates. So, one must go long on duration or take some credit to get real positive returns (returns which are higher than inflation). This is also the reason why investors have invested in other fixed income instruments like credit risk funds,” said Sivakumar.

Market participants say that steps taken by the government and the Reserve Bank of India (RBI) since outbreak of the virus, has also helped non-AAA rated corporates to improve their financial condition. Fund managers also say that regulatory changes have helped improve liquidity and boost investor confidence.

Market regulator the Securities and Exchange Board of India (Sebi) recently mandated fund houses to hold at least 10 per cent of their net assets in liquid assets many categories of open-ended debt schemes.

Currently, there are 18 fund houses that offer open-ended credit risk funds. The cumulative assets for this category stood at Rs 28,756 at the end of January.