Shobhit Mehrotra Senior Fund Manager - Fixed Income and Head of Credit, HDFC Mutual Fund, believes it is the right time to look at credit risk funds given the credit spread in the corporate debt segment.
"It is an opportune time to take advantage of the credit spreads available in the corporate debt segment and as the economy begins to pick up, there could be more cases of investment upgrades," said Mehrotra.
The recent credit events in the debt markets have resulted in the widening of credit spreads. In 2019, the average month-end spread between 3 years AA rated papers and 3- year G-sec was ~169 bps compared to a 5-year average of ~137bps.
Credit risk funds invest in corporate debt paper or corporate bonds which are below highest grade rating.
Also, Mehrotra said since credit risk debt funds invest in lower-rated paper, they provide a higher carry than the traditional fixed income schemes.
Traditional fixed income schemes invest in high rated bonds and government securities. A small allocation of credit risk debt funds could improve the overall portfolio returns of an investor.
The diversification in credit risk funds reduces the risk arising from credit downgrades and defaults. Hence by assuming some risk through credit risk debt funds, an investor could improve their overall portfolio returns.
He believes, since debt, as an asset class is less volatile and relatively safer than equities. Adding debt mutual funds in the portfolio helps reduce volatility and bring stability to the overall portfolio, he said.
Mehrotra recommends investments in short-to-medium duration debt funds as the short to medium end of the yield curve offers better risk-adjusted returns.
Mehrotra feels that over the last few years, mutual funds have witnessed instances of credit stress where ratings were eventually downgraded to BBB or below rating category in nearly 16 companies or Groups.
He also said that the measures taken by the government for capitalisation of public sector banks is likely to resolve the issues of NBFCs.
In the past two years, the government has infused about Rs 1.9 trillion into PSU banks. Many mutual fund houses suffered due to the NBFC crisis that surfaced in September 2018.
The last few years have witnessed a significant deterioration in asset quality of banks with a sharp increase in Gross Non-Performing Assets (NPAs).