Credit-risk funds post 8.97% 3-year return; experts flag thin yield — SkimNews
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- Credit-risk funds delivered 8.97% returns over three years, emerging as the best-performing debt mutual fund category, with the gains driven by improving corporate balance sheets, narrowing credit spreads and high accrual income from AA and below-rated securities
- Nirav Karkera, head of research and fund manager at W by Groww, attributed performance to three factors: credit spread earned on lower-rated securities, duration gains during the Reserve Bank of India's 125 basis point repo rate cuts through 2025, and the absence of major defaults or downgrades
- Credit-risk fund portfolios carry an average 55-59% exposure to AA-rated bonds and a yield to maturity of roughly 8-8.4%, with the spread between this yield and the repo rate widening from 1.6% in mid-2023 to about 2.8% currently
- The category's current yield to maturity of around 8.1% sits only 60-120 basis points above clean banking & PSU or corporate bond funds, and Karkera said the extra yield is 'thin relative to the risk' given compressed spreads
- A-and-below rated exposure varies dramatically across funds—from around 0.5% in conservative funds to nearly 18% in aggressive ones, meaning the same category label can hide substantially different portfolio risk
- Nehal Meshram of Morningstar Research India said credit-risk funds suit only investors with higher risk appetite and a 3-5 year holding period as a satellite allocation, and Karkera warned against using them for emergency or near-term money, recalling 2020's liquidity squeeze
Why it matters: The 8.97% headline return is largely a product of past conditions—narrowing credit spreads, RBI rate cuts and benign default environment—that may not persist. With spreads compressed and the yield premium over safer debt funds down to 60-120 basis points, retail investors chasing recent performance risk taking on materially higher credit and liquidity risk for diminishing compensation.
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