Are you an investor of Debt Mutual Funds? If so, then you might have heard about the credit risk. However, you may surprise with an idea of how such credit risk be utilized by debt mutual funds. These Credit Opportunities Funds are new types of funds, which utilize the credit opportunity.
Before proceeding further, let us first understand a few basics of Debt Funds or Bond Market.
Bond Price Vs Interest Rate–
Let us say currently SBI Bank offering you the FD at a 9% interest. If someone offers you a bond, which gives you a yearly coupon of 10%, then you definitely look forward to buy this bond rather than FD. Therefore, when many will chase to buy the bond, which is offering a 10% coupon, then definitely the price of a bond will increase.
This is the effect of interest movement on bond price. Higher the interest rate means lower the bond and vice versa.
Bond Yield–
Yield is a measure of interest income generated by a bond. The formula to calculate a Yield is as below.
Yield=Coupon Amount/Bond Price.
Let us say you are holding a bond with a price at Rs.100 and giving you an annual coupon of Rs.10. In this case, the yields will 10%. Let us say, due to an increase in interest rate, the bond price decreased to Rs.90 then the yield will be increased by 11.11%. At the same time, let us say, due to fall in an interest rate, the bond price increased to Rs.110 then the yield will be Rs.9.09%
Which is profitable for you? Investing Rs.100 bond and getting a coupon of Rs.10 or investing in Rs.90 bond and getting the same coupon of Rs.10? Obviously the Rs.90 bond. Hence, lower the bond price means higher the yield and vice versa. You notice that a bond price is inversely proportional to yield.
For bond funds, the weighted average of a portfolio of bond yield is calculated. This is called as yield to maturity. Yield to maturity is an expected yield, which you receive if you hold the bonds in the portfolio until maturity.
Modified Duration–
This is a measurement of bond’s sensitivity to interest rate movement. It is measured in years. Let us say, the modified duration of a bond or bond fund is 5 years, then for any interest rate movement of 1% the bond price or NAV of a bond fund will move to 5%. The longer the modified duration, higher the sensitivity to interest rate movement. Hence, you have to choose the lower modified duration bond or fund.
Average Maturity–
As the name indicates, it provides you an average maturity of all bonds held in a portfolio of funds. Higher the average maturity means the higher the risk of interest. Therefore, you have to look at underlying bond fund average maturity before going for investing.
Accrual strategy of Fund (Credit Risk Strategy)
The major intention of such funds is to provide a better return. They usually not bother about the interest rate cycle. However, they try to provide you had better return by holding low duration and low-rated corporate bonds. Along with that, they may generate higher yield if the corporate bond rating goes up and ultimately that effect in an increase in the price of a corporate bond. Overall resulting in higher yield.
Therefore, in accrual strategy, the fund manager will try to provide a better return by indulging in buying of corporate bonds (which may be low in credit rating). Here the intention is clear; to hold the bonds, which provide high yield irrespective of credit rating. However, there is a risk of default due to low credit rating.
Duration Strategy of Fund (Interest Rate Risk Strategy)–
If a fund manager takes a duration strategy based on interest risk, then such strategy is known as duration strategy. For example, if an interest rate drops then the fund manager tries to hold long maturity bonds and at the same time if an interest rate raises, then he adjusts to short-term maturity bonds.
Therefore, they increase the duration if the interest rate falls and do vice-versa when interest rate rises.
What are credit opportunities funds?
They are Debt Mutual Funds. Credit opportunities funds adopt the accrual strategy to provide the better return. They take the credit risk for the sake of generating high yield. Usually, they invest in low credit rated funds like less than “AA” rated. Lower the credit rate leads to higher the return. Because the risk of default also increases.
Here you will find two types of opportunities for a fund manager to provide better returns. One is holding the low-rated corporate bonds. The second is, if a company performs well then the same credit rating agency may grade it higher. In such a situation, the price appreciation will definitely effect into a better return from such funds.
Ideally, fund managers not only look for a current credit rating, but also at the health of a company. If the company has a huge opportunity to grow, then it turns to be the best choice for a fund manager.
Whether it is best to hold such funds?
Why we all hold debt funds? The main idea is to cushion the risk of what we have already in equity investment by diversifying properly. Therefore, I do not think it is good to hold such funds and borne more risk. The risk I have in equity is enough and no more risk from debt funds too. Hence, I stick to short-term goals than any such type of experimental strategy.
Few Credit Opportunities Funds in India
You may find the list HERE.
I am not recommending any funds. Because for two reasons. One as I said, I look forward to debt fund for cushioning my risk of equity and as a tool of diversification. Second, it is risky when compared to short-term bond funds as such credit opportunities funds primarily hold corporate bond which are low in credit rating. My basic idea is to share about such type of funds.
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View Comments
Hi Basu,
I have two queries : 1. I have chosen Franklin Templeton Low duration fund Direct Growth .
Is this fund credit opportunities fund?
2. All my funds, i have chosen to invest through SIP , Is that redemption period applicable all SIP's ?
I mean the above fund redemption period 3 months , shall i redemptive after 3 moths without any redemption charges . My question remaining 1 sip completed 3 moths ,other two sip also need to complete 3 moths periode
Please clarify
Regards
Chandu
Deear Chandu,
1) It is a short term income fund with an average maturity of the portfolio is around 1.7 Yrs.
2) Each SIP units has to complete 3 months to avoid exit load (in your example).
Hi Basu,
Thank you for yet another informative and interesting read!
I’ve been following your articles for a while now and I couldn’t find a way to subscribe to your website in order to receive an email (or some notification) whenever you post a new article. Kindly help me out if there is any way to do so.
If you don’t mind, I want an advice from you..
I’d like to make an investment of 50k – 60k for a period of one year. I’ve low to moderate risk tolerance hence I’d expect a return of 8 – 12 %. Kindly suggest which investment tool should I go for?
I’m 24 Y/O and currently, I’m invested in the following SIPs:
DSP BR Micro Cap Fund: 4000 (since past 15 months)
Axis Long Term Equity: 1500 (since past 15 months)
Aditya Birla Sun Life MIP II -Wealth 25 Plan: 1500 (since past 2 months)
HDFC Balanced Fund – Direct Plan: 1500 (since past 2 months)
L&T Value Fund: 1000 (since 15 months)
Total = 9.5K
I started out with all the SIPs with no real goal in mind but just to start saving at an young age. Also, SIP period for all is 5 years and invested directly through Mutual Finds Utility.
But in one year or so I need to reach a goal of INR 2 Lakhs as I’ve some commitment.
As I’ve approx 1 Lakh in my bank account, I’d like to give exposure of app 60K to a low risk investment for a period 1 year and get a return of 8 to 12% (or atleast close tot that)
Please suggest an appropriate tool or fund in order to achieve my goal.
Your input for my mutual find portfolio will be highly valuable as well ?
Thanks in advance!
Kind Regards,
Rahul
Rahul-There is a subscription box at right side area of blog, where you can provide details and subscribe. Don't touch equity products for your such 1 year goal.
Dear Basu,
Thank you for the reply.
Regarding the investment option, could you please elaborate a bit?
As to which mode of investment or fund to look into?
Rahul-Refer my posts "Top 10 Best SIP Mutual Funds to invest in India in 2017" and "Top and Best Debt Mutual Funds in India for 2017".
hi sir, with RBI's recent rate, and falling interest rate scenario, most of the fund managers are reducing the portfolio holding in Duration strategy and asked their client to increase the percentage in funds following Accrual Strategy . As you said, I am also looking at Debt fund only for my portfolio diversification.
Also, should I follow the SIP route or invest, say an years SIP as Lumpsum? I believve with Debt funds, it is better to do lumpsum.
please advice
Yavika-Without knowing the reason or your financial goals, it is hard for me to guide anything.
My immediate goal is 5yrs away, my son's education. I have monthly SIPs of around 1 lakh(80%eq and 20% debt) I have already invested 80% in Equity and my agent suggested 20% SIP in BSL dynamic bond fund for debt portfolio, which I have not yet started. I want to increase my SIP investment from 1 lakh to 1.5L per month.
Apart from this, I have 24L in Equity and 6L in Debt in ICICI Pru Long Term fund (g). this is a duration strategy fund. Should I look for Accrual Funds?
Yavika-I suggest not more than 10% to 20% into equity when your goal is around 5 years. Also, in case of debt funds, stick to short term or ultra short term debt funds (even short term gilt) are best than timing the market and chasing return. You have already enough volatility due to equity, you are diversifying to compensate that, then stick to the low volatile product. It is the biggest myth among many that debt funds are SAFE.
thank you, i will look for short term debt fund. since i want to hold for 5 yrs, i will avoid ultra short term funds.
Hi,
I want to invest Rs. 5L on behalf of a 63 year old relative. He wants fixed monthly income from it. I have explored SSC, FD and banks but not impressed with the returns. Is there any option in mutual fund? Any good fund for that purpose? Moreover, will he get tax deduction on the invested amount and will the returns every month non-taxable? What is dividend tax?
Regards,
Mrinal
Mrinal-Whether his dependency is from this income? Do remember that, considering his age, I suggest to stick to the products you already invested. MF investments are volatile and there is no guarantee attached to it. Hence, don't risk his money if his monthly expenses are depending on such investment.
HI there,
I would like to seek your advice for effective management of different Mutual SIP, we are a couple with 2 children and like to plan for education for in 6 years duration and my retirement on long term basis.
My present allocations are below, please suggest if it needs any changes
Birla Sun Life Frontline Equity Fund - Direct Plan (G) 4000/-
Franklin India Bluechip fund growth 4000/-
ICICI Prudential Value Discovery Fund (G) 5000/-
IDBI NIFTY index fund 5000/-
Motilal Oswal MOSt Focused Midcap 30 Fund - Direct Plan 6000/-
ICICI Prudential Balanced Fund (G) 2000/-
Your advice is much appreciated
Thanks
Suri
Suri-Where is your debt portfolio? Also why two large caps, one Index Fund (which again concentrate on large-cap)?
Hello sir,
Could you please let me know few good short term bond. Actually u told franklin short term bond is credit opportunity bond & value research shows it as short term bond. So want to know whether birla short term bond is safe and its not credit opportunity bond? I know birla's medium term bond is credit opportunity one but not sure of bsl short term.
Regards,
Anchit
Anchit-Refer my latest post "Top and Best Debt Mutual Funds in India for 2017".
I would like to invest 1 lac in debt fund for the period of 2-3 year...on otherside m investing 4k per month in balance n large cap. For such short duration, is it advisable to invest in debt or credit opportunity fund?
Harsh-Avoid equity and debt. Simply use Bank RDs or FDs. If possible arbitrage funds.
I am very thankful to you for sharing and helping everyone here. Can you please suggest what one can do with 20 Lakhs to generate 20,000 per month without loosing capital amount. Where one can invest that 20 lakhs in lumpsum.
Lovely-You are expecting returns of around 12%, which is hard to generate from secured products.
Thanks for reply.
Can you please suggest how 20 Lakhs should be divided in to funds type. For eg 25% equity long term 25% debt short term 25% fixed deposit 25% mid cap fund?
The risk profile should be low and liquidity should be easy. Just to park the money to generate some money to purchase home in future.
Lovely-I am not sure of your goal. Initially you pointed that you need fixed monthly income from it. Now you claiming to be this is required for your home purchase in FUTURE, which I don't know when. Hence, hard for me to guide anything.
Dear Sir,
Which is better to invest : Banking & PSU debt mutual funds or Bank Fixed Deposit
Since Banking & PSU debt funds invests only in Banking & PSU sectors, will it be more risky when compared to other debt funds which invests in debt instruments of all the sectors.
Since the portfolio of Banking & PSU debt funds has only AAA rated debt instruments, I feel it to be less risky even though it invests in only Banking & PSU sector. Kindly advise.
Thomas-The fund I named is different from the Bank FDs. You check the ranking of underlying instruments. All are AAA means secured right? Hence, go ahead.
Hi,
I want to invest 10,000 per month in Mutual Funds to collect money for Home Loan Down Payment. I have selected a few funds mentioned below. Please let me know your suggestions on which funds should I invest in.
ICICI Pru Exp&Other Services-RP (G) - 2,000
ICICI Prudential Value Discovery Fund (G) - 2,000
SBI Blue Chip Fund (G) - 2,000
HDFC Liquid Fund (G) - 2,000
DSP-BR Micro Cap Fund - RP (G)- 1,000
Axis Income Fund - Growth- 1,000
Thanks in advance,
Lokesh
Lokesh-Your timeframe?