Credit risk funds have perhaps been the most controversial product of the Indian mutual fund industry. This is because SEBI mandates that the fund invests a minimum of 65 percent in AA and below rated paper. This means they invest in those companies where there is a risk that the company may not be able to repay fully or partially the money which it has raised.

Kirtan Shah of SRE says this category is meant for 'sophisticated investors' who understand credit risk and not retail investors. The category lost nearly 19 percent of its assets under management in just 3 days following the winding up of the 6 debt schemes by Franklin Templeton. It has seen monthly outflows for every month of FY20 and the FT episode exacerbated that. In April 2020 alone, over Rs 19,000 crore was redeemed from credit risk funds. Many experts caution that the 1-2 percent of extra returns generated are not worth the risk and in any case, on a rolling return basis, the category has fared only marginally better than short term funds.

First Published:May 11, 2020 12:22 PM IST