Credit risk funds are outperforming. Should you invest?


Credit risk funds, which were severely hit by a series of defaults and downgrades in 2018 to the beginning of 2020, have undergone revival to offer average 19% returns in the last one year. This is when most of the other debt mutual fund categories are struggling to match even the bank fixed deposit returns. BOI AXA Credit Risk Fund has outperformed all the other schemes in the category giving triple digit returns as high as 150%.

What has caused this superior performance? Should you invest in these funds to earn higher returns? How to select a good credit risk fund? Devang Shah, co-head - fixed income at Axis AMC explains the functioning of credit risk funds in detail. In the near term, Shah believes that the credit cycle looks good and he does not see any credit defaults in the near term. However, investors should understand that these funds are subject to credit risk, he adds.

While he agrees that the category has shown a good performance, he asks investors not to fall for outliers offering abnormally high returns. "These schemes have some ridebacks of previous downgrades of restructured or default assets which has led to massive outperformance for certain funds," Shah says. His investment mantra for credit risk funds is to go for a well-diversified and lower duration portfolio with staggered maturity.

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