Tuesday, 26 September 2017

Credit Opportunity Funds: a relief for retail investors

By Aarushi Singh

Credit opportunities funds essentially play on the credit ladder and don’t depend on interest rate movements to earn returns, unlike the traditional bond funds. These funds generate returns from interest accrual, mainly investing in higher yielding but lower rated (AA or below) corporate bonds.

There has been growing popularity for these funds as these can help negotiate the uncertainty in interest rates amid talks of a fiscal stimulus which is aimed at reviving growth. This category of fund has given a return of 9.1% over the last one year on the other hand bank fixed deposits have yielded approximately 6% and 6.75%. This differential is attracting investors towards credit opportunity funds and many top performers like Baroda Pioneer, Franklin India Dynamic Accrual Fund and Aditya Birla Bond fund are giving returns of 9.5%-10% over the last one year.

Wealth managers also believe that investors need to be careful while investing in these funds as they are investing in lower –rated paper that carries default risks.

Therefore, with declining rates on small savings and bank fixed deposits, lack of opportunities in company deposits fixed income investors are attracted to this category of funds but they need to be aware about the default risk associated to it.

No comments:

Post a Comment