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.
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