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Over the last year, despite the COVID pandemic, Credit Risk Funds, in the debt fund category, have given the highest returns during the last one year period, averaging at 9% p.a. Credit risk funds take significant exposure (at least 65%) to ‘not so high quality’ papers, which have credit ratings of AA and below, with an aim to generate higher returns. Other debt investment counterparts such as dynamic bond funds, gilt funds, and money market instruments have provided average returns of only 3-5% during the same period.

The primary reason for the outperformance of such funds is that the spread which these funds have enjoyed was around 150-200 basis points, 1.5-2% more as compared to similar tenure debt funds. 

Returns of Top Performing Credit Risk Funds

Fund Name Returns (1 Yr) Current YTM (post expense ratio)
Baroda Credit Risk Fund 16.80% 3.91%
BOI Axa Credit Risk Fund 14.74% 4.04%
HDFC Credit Risk Debt Fund 12.40% 5.99%
Aditya Birla Sun Life Credit Risk Fund 11.86% 5.27%

*Returns of regular plans

Primarily, higher risk perception in the minds of investors and the expectations of defaults from lower-rated corporate borrowers due to the pandemic had caused fund outflows from credit risk funds since April last year as investors became more cautious. As per AMFI data, credit risk funds had witnessed significant outflows of around Rs.19,239 crore in April 2020 itself followed by continued outflows of Rs. 10,000 crore from May 2020 to April 2021. 

Investor caution was further accentuated due to other events such as the IL&FS downfall in 2018 and the Franklin Templeton shutdown of 6 schemes in April 2020. However, the performance of last year is unlikely to be repeated going forward as YTMs of these funds have declined.