3 weeks ago
Credit-risk funds lead debt returns, but risks remain high
Credit-risk funds are investment funds that lend money to companies with lower credit ratings.
They earned 8.97% over the last three years, which was the best performance among debt-fund categories.
Companies became financially healthier, and fewer worries about defaults helped these funds.
Falling interest rates also increased the value of some bonds.
However, higher returns come with higher risks.
A company could have its rating lowered or fail to repay its debt.
It may also be difficult for the fund to sell some bonds quickly during a crisis.
Experts say these funds are better for people who can keep their money invested for at least three to five years.
People needing stable or emergency money should generally avoid them.
Credit-risk funds delivered 8.97% over three years, the highest return among debt-fund categories.
Improved corporate balance sheets, narrower credit spreads and easing interest rates supported performance.
The funds invest at least 65% in corporate bonds rated AA and below, increasing credit risk.
Experts warn that defaults, downgrades, illiquidity, concentration and sharper NAV declines remain possible.
The category may suit higher-risk investors with three-to-five-year horizons, but not retirees or near-term needs.
- Who
- Credit-risk funds and investors, with assessments from analysts Nehal Meshram and Nirav Karkera.
- What
- Credit-risk funds delivered 8.97% three-year returns, while experts assessed their risks and suitability.
- Where
- India's debt mutual-fund market.
- When
- Over the three-year period discussed; the interest-rate easing cycle began when average modified duration was about 2.3 years in late 2024.
- Why
- Improved corporate finances, narrower credit spreads, higher accrual income and falling interest rates supported returns, while lower-rated holdings created additional risk.
Performance and Income Case
Risk and Caution Case
Attractiveness after strong returns
Performance and Income Case
Supporters of the category can point to its 8.97% three-year return, relatively high accrual income and gains from narrower credit spreads and falling interest rates.
Risk and Caution Case
Experts caution that past performance may reflect a favourable credit cycle and the absence of major defaults or downgrades, rather than a permanently superior investment strategy.
Yield premium
Performance and Income Case
Credit-risk funds currently offer yields above cleaner banking and public-sector or corporate-bond funds, potentially providing additional income.
Risk and Caution Case
The extra yield is only about 60-120 basis points, and experts say this premium may be too small compared with the added credit and liquidity risks.
Investor suitability
Performance and Income Case
Investors with higher risk tolerance and a three-to-five-year holding period may use credit-risk funds as a satellite allocation within a diversified debt portfolio.
Risk and Caution Case
Conservative investors, retirees seeking capital stability and people investing emergency or near-term money should generally avoid the category.
Key facts
- Three-year return
- 8.97%, the highest among debt mutual-fund categories
- Required lower-rated exposure
- At least 65% in corporate bonds rated AA and below
- Typical portfolio exposure
- Around 55-59% in AA-rated bonds, according to Nirav Karkera
- Current yield to maturity
- Approximately 8.1%, or about 60-120 basis points above comparable safer debt funds
- Interest-rate support
- The Reserve Bank of India cut the repo rate by 125 basis points through 2025
- Suggested holding period
- At least three to five years for investors with a higher risk appetite
- Main risks
- Credit downgrades, defaults, liquidity stress, issuer concentration and exposure to stressed sectors
Quotes
Nehal Meshram
Senior research analyst at Morningstar Research India
“Credit-risk funds have benefited from a favourable credit cycle over the past three years.”
livemint.com
“With spreads this compressed, the extra yield is thin relative to the risk.”
livemint.com
Sources
Related news
India bond yields above 7% make 3–5-year debt attractive
High-Yield Bonds Offer More Income With Greater Risk
Riskiest US Corporate Debt Turns Distressed Amid Rising Yields
Mutual Fund Flows Diverge From Returns Across Major Categories
Small-Cap Funds: High Returns Come With Varied Volatility
AI Volatility Could Push Global Portfolios Toward India, Morningstar Says
Saudi Pipeline Restart Eases Asia Supply Fears, But Prices Rise
Shein Shares Fall After Hong Kong Debut Highlights China Roots
Warsh Jackson Hole Speech Raises Rate-Hike Bets, Pressuring Indian Assets
