Dear Editor, In times of economic slowdown, returns from investments made in equity might lose some lustre. It is evident from the past that when economic growth slows down, debt investments could give higher returns than equity. For instance, when the global economic crisis struck in 2008, the equity returns for the year were -51%, while returns from debt instruments stood at 28%. If you are looking forward to investing in debt instruments, you should consider Credit Risk Funds as an option. You might have come across news reports in the recent past where some debt mutual funds, including credit risk funds, did face trouble as the underlying bonds witnessed a default. Since September 2018, multiple companies that issued bonds were unable to honour their repayment promises. The result was that many investors realised that the risks highlighted from time to time, even for debt investments, are for real. Accordingly, many investors had to be content with a lower than expected return in these debt funds. Some investors even lost part of their principal amount invested. Credit risk funds do have their own share of risks, which have been evident in the recent past.The nature of credit risk funds is such that if the bonds selected by the fund managers to invest the fund’s corpus are good, the performance in the future can be rewarding. At the same time, if the selection process is not up to the mark, the investment journey can turn out to be sour. There have been 22 defaults by bond issuers between September 2018 and October 2019. To begin with, find out the Credit Risk Funds that were hit due to the defaults by bond issuers in the recent past. This will also give you a sense of the existing credit risk funds that were not impacted in the recent defaults. For instance, the ICICI Prudential Credit Risk Fund remained unaffected despite the default which means that the fund’s managers had the foresight to not invest in any of these 22 bonds, despite their ratings being at an investment grade level. Ankit Sharma, Via-e-mail.
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