- Date : 31/08/2023
- Read: 3 mins
Credit risk funds gain post-COVID momentum, signalling robust returns. Expert R Sivakumar advocates strategic allocation to navigate changing interest rates and maximise gains.
If you're a debt fund investor pondering where to park your money for consistent returns, the answer might just lie in credit risk funds. But before you raise an eyebrow, let's dissect what R Sivakumar, Head of Fixed Income at Axis Mutual Fund, has to say about this.
Highlights:
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Sivakumar suggests reconsidering credit risk funds for untapped post-COVID opportunities.
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Despite narrower spreads than before, there's still promise of higher yields in AA-rated bonds.
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An anticipated repo rate cut, around 6–8 months away, factors in global conditions and potential inflation spikes
A new perspective
Sivakumar said it is a good time to reevaluate credit risk funds as a part of your investment strategy. However, he emphasises a measured approach. Credit risk funds, which invest a minimum of 65% in bonds with AA and below ratings, faced a rough patch after the credit crisis following Infrastructure & Leasing Finance Corporation's meltdown in 2018. But, Sivakumar asserts, it's time to change. The post-COVID era has witnessed credit emerging as a star performer within debt mutual funds.
The spreads might not be as wide as they were five years ago, but Sivakumar suggests that if the economic investment cycle gains momentum, more issuances of AA or A-rated bonds could present opportunities for those seeking higher yields.
Timing the rate cycle
The next question is when will interest rates finally dip? Sivakumar forecasts a wait, explaining that factors like the El Nino impact and potential US Federal Reserve actions could delay a repo rate cut for another six to eight months.
What are the investment strategies?
With long-duration funds displaying an 11.74% return over the past year, these options are gaining traction among investors. While long-term G-Secs could be on your radar, don't overlook short to medium-term bonds. Their yields could respond more favourably to rate cuts.
As for investment strategies, Sivakumar suggests considering long-duration funds and dynamic bond funds for investors with a longer horizon. The recent correction in the 10-year benchmark yield, down to 7% from 7.6%, might pique the interest of those worried about interest rate risks.
Sivakumar also briefly touches on bullion commodities, such as gold and silver, as they can serve as effective risk hedges, especially during market turmoil. They provide diversification beyond traditional investments.
Also Read: Direct Funds Complete A Decade. Know Why They are Better Than Regular Funds.
Changing taxation landscape
The change in debt fund taxation might have raised concerns. However, Sivakumar believes that while the tax arbitrage avenue has closed, the appeal of professionally managed mutual funds endures. Returns on debt funds are taxed only during redemption, providing a way to defer tax liability.
The takeaway
Sivakumar advises diversification in debt fund investments by distributing exposure among issuers based on their ratings to manage risk and outcomes effectively.
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Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.
