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Photo: iStock
Photo: iStock

What is the credit risk fund category?

A credit risk fund is a type of mutual fund that tries to generate higher returns by investing in lower-rated corporate debt

A credit risk fund is a type of mutual fund that tries to generate higher returns by investing in lower-rated corporate debt. Such securities pay out a higher yield than high-rated corporate debt or government bonds which also carry lower risk. In return, a credit risk fund takes on the risk of default or downgrade on these securities.

These funds need a stable or improving credit environment to outperform other debt categories. According to the Securities and Exchange Board of India, credit risk funds must invest at least 65% of assets in papers rated below AA+.

This category has fared poorly since September 2018, when India began experiencing a debt crisis starting with defaults in the IL&FS group. This crisis became severe, with downgrades and defaults in other groups such as DHFL and Vodafone Idea.

The assets under management of these funds have shrunk from close to 80,000 crore to 55,000.

With the covid-19-driven lockdown, their problems have grown more acute. Redemptions have risen but they are not able to sell their holdings in the bond market to meet redemptions due to lack of liquidity in low-rated papers.

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