Not even the staunchest supporter had seen this coming. As many as three credit risk funds sport negative returns in the 1-year period. Credit risk funds are sold as a way to generate highest returns among debt funds, but with high return comes high risk. Credit risk funds are those debt funds who invest in corporate bonds, with at least 65% of total assets (investment in below highest rated instruments). Such a risky strategy, combined with big allocations, have hit three credit risk funds hard. Existing and new investors should know what exactly happened. Read on.
BOI AXA Credit Risk Fund
This fund was launched by BOI AXA Mutual Fund in February 2015. In the one-year period ended May 16, investors in BOI AXA Credit Risk Fund have seen 7.61% drop in net asset value. So, anybody who had invested Rs 100,000 a year back, will see their fund investment value drop to Rs 92,400.
BOI AXA Credit Risk Fund has become the worst performing credit risk fund in the last 1 year and 3 year periods. There are two main reasons. One, exposure to troubled companies like IL&FS, Sintex-BAPL (more on this below) etc. Two, outflows from the scheme.
Additional read: BOI AXA Credit Risk Fund’s IL&FS troubles show ‘risk’ in these funds
BOI AXA Credit Risk Fund in October 2018 wrote off its entire outstanding exposure to IL&FS entities. This happened after the scheme took a haircut after IL&FS defaulted on debt repayment. If this was not enough, just days ago, one of the rating agencies downgraded Sintex-BAPL. BOI AXA Credit Risk Fund had about 19-20% exposure to this company. The downgrading of ratings forced the scheme to take a mark to market hit, pushing down NAV on Monday by 5.7%.
Recently, CARE Ratings downgraded various loan facilities of Sintex-BAPL citing lack of co-operation from the company in sharing the data required to keep track of the firm’s credit quality.
CARE has been seeking information from Sintex-BAPL to monitor the ratings vide different e-mail communications, and during personal meetings held with the company management. But the company has not provided the requisite information for monitoring the ratings, CARE said. Following this, the ratings on BAPL’s bank facilities and instruments will now be denoted as CARE BB+; Stable/CARE A4; ISSUER NOT COOPERATING*,” CARE said.
A ratings downgrade leads to change in valuation of the rated security. As per fund managers, below-investment-grade downgrade of any a paper should trigger a 15% initial discount before agencies give out valuations. This means, BOI AXA can potentially discount Sintex-BAPL exposure much more in future. Sintex-BAPL is engaged in manufacturing of various engineering plastic components for automobile original equipment manufacturers (OEMs), tier-I auto ancillaries and electrical goods manufacturers in the domestic market.
Track the fund on RupeeIQ fund page by clicking here.
Invesco India Credit Risk Fund
It was IL&FS again that did in Invesco India Credit Risk Fund. It had about 7% allocation to debentures of IL&FS once, and today the rating on those debentures are rated ‘D’. This rating means issuers with this rating are in default or are expected to be in default soon.
The IL&FS fall out has ensured that Invesco India Credit Risk Fund is the second-worst performer among peers in the one year period. It has now lost 2.36% of NAV value in one year period ended May 16. In three-year time frame, the fund is the third worst performer.
The fund-house has tried to assuage investors’ frayed nerves. Only time will tell what will happen to the fund. In April this year, Invesco MF made Invesco India Credit Risk Fund one of the 14 funds where 10% of units now will be exit-load free for redemption before 1 year In 14 funds.
DSP Credit Risk Fund
Last but not least, the DSP Credit Risk Fund is an old-timer. The fund has been around since 2003. In the last one year period, the fund has lost 1.5% already.
DSP Credit Risk Fund has done badly as others above. It has been hit hard by IL&FS fall-out. As on last month’s factsheet, this scheme also had a 2.5% exposure to Sintex-BAPL. We already know what happened to Sintex-BAPL.
In March this year, Pankaj Sharma, Head-Fixed Income Assets of DSP Mutual Fund resigned. DSP MF had got embroiled in the DHFL fiasco with the fund offloading the housing finance company’s commercial paper at a higher yield.
RupeeIQ take – Credit Risk funds hold more than 65% of their assets in low rated debt. More specifically they hold 65% of their assets in debt rated below AA+. In return, they get higher interest rates on such paper. However, the threat of defaults and downgrades looms large on them. Investors should exercise extreme caution while dealing with these funds. Advisors and fund company officials may think the worst is over for credit risk funds, but that is far from the truth. Corporate defaults or problems will happen, and nobody knows when. So, choose your fund very wisely. Do not try to get into these funds because their NAV has already been marked down.
Disclaimer – Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.