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Thursday, May 12, 2016

Credit Fund Online

With falling interest rates, savvy investors are scouting for high yielding assets like credit funds, a type of debt fund, that generate higher investment returns
 

1.What is a credit fund?

It is a type of debt mutual fund scheme, which invests in rela tively riskier corporate bonds to earn higher in terest rates. Unlike top rated bonds, fund man agers typically invest in securities rated as AA-, A+, A-, BBB, etc. Those apers normally mature papers normally mature in 1-3 years unlike long maturity bonds. So, here you invest in such schemes to have indirect exposure to lower-rated securities to earn high er rates.

2. What is the return potential?

More than what top-rated bonds yield. These bonds can help a fund manager earn up to 2.0 percentage points higher gross yields than toprated papers. In the past one year, credit funds have returned about 8.91% on average. For the past three years, the verage is 9.21%. But, in average is 9.21%. But, in vestment returns are not tax free.

3. Was there any concern in credit funds recently?

Yes. A possible default risk over two companies including -Amtek and Jindal Steel & Power -loomed large since August last year, hurting investor sentiment. Both companies' credit ratings were downgraded. This led to a 9% erosion in assets under management for the entire industry in the past seven months.

4. What is the status now?

Concerns have eased as both companies honoured repayments fully or partly.

5. So is there any chance it will trigger fresh investments?

It should, especially when we are in a falling interest rate regime where informed investors are looking for bets in high yielding assets.

6. How many such schemes are there in India?

At least 28 such schemes are offered by top fund houses including Birla Sun Life, DSP BlackRock, Franklin India, ICICI Prudential, Kotak, Reliance Mutual Fund and UTI.

7.  What are the top two performing schemes?

DHFL Pramerica Credit Opportunties and Baroda Pioneer Credit Opportunties funds. In the one year till April 19, they have returned 10.38% and 10.11%, respectively

 

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