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Credit fund assets zoom 60% in last 10 months

Ashley Coutinho / Mumbai 21 Feb 17 | 11:57 AM

Credit opportunity funds that look beyond AAA-rated papers have come back in the limelight with possibilities of rate cuts declining after the recent policy announcement by the Reserve Bank of India (RBI). 

The pause in the rate cut cycle has limited opportunities for funds that play on duration since prices of longer tenure bonds move up in a declining interest rate environment. Debt fund managers are now turning to accrual funds, more specifically credit opportunity funds, to capture the higher yield from lower rated papers and take advantage of capital gains, if any, arising from rating upgrades.

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In the last 10 months alone, the assets of these funds have grown by nearly Rs 30,000 crore to Rs 80,000 crore. In the past one year, these funds have returned average category returns of 10.7 per cent, according to Value Research data. 

Credit or bond opportunity funds take a deliberate credit risk and seek to gain from mispriced opportunities or gain from higher accrual in corporate bonds that do not enjoy high credit rating. 

"Since interest rates are not expected to fall further, gains to be made by riding the interest rate curve at this point are limited. One can get higher yields of 100-200 basis points over a normal duration fund by investing in these funds," said Manoj Nagpal, CEO, Outlook Asia Capital.

Mutual funds don't go below the long-term A-rated paper but they can technically go up to BBB, which is considered investment grade, say experts. Going below this requires permission of the fund's trustees.

Post the Amtek Auto episode last year, investors and funds are taking greater precautions while selecting papers. "The general rule of thumb is to avoid stressed sectors like real estate and commodities," said Dwijendra Srivastava, CIO (fixed income), Sundaram MF.

"Few funds have the capability to do proper due diligence. The funds can’t just rely on third party credit ratings, in-house capability is as important," added Nagpal. 

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