4 Cs are critical for credit risk funds

Shobhit Mehrotra

Sr Fund Manager & Head of Credit


  • In an environment where credit and liquidity risk have come into sharp focus in the retail- favourite credit risk funds category, Shobhit spells out 4 Cs that his team focuses on to ensure credit quality: character, capacity, collaterals and covenants
  • The 4 Cs coupled with a robust credit scoring model that factors in parentage, financials, rating and outlook, help optimize portfolio quality and construct – which has contributed to a healthy track record of avoiding credit accidents in recent years
  • While 1 yr returns from credit risk funds have been disappointing, the bright side is that portfolio YTMs are now significantly higher, which augurs well for returns going forward

Click here to download presentation of HDFC Credit Risk Debt Fund

WF: What is your fund’s exposure to NBFCs and HFCs? What changes if any have you made to your portfolio composition and/or strategy in light of the challenges being faced by NBFCs and HFCs?

Shobhit: HDFC Credit Risk Debt Fund’s exposure to NBFCs & HFCs is well below the regulatory limits. As against permissible limits of upto 25% for NBFCs (general sectoral limit) and upto 15% for HFCs, HDFC Credit Risk Fund had exposure of 19.12% in NBFCs and 4.75% in HFCs adding up to 23.55% as on October 31, 2018, against 40% regulatory norm. Even within the NBFC exposure, 6.9% exposure is to AT1 (Additional Tier 1) perpetual bonds issued by banks both private as well as public sector. We have an ongoing credit review process with a focus on asset-liability. In the current environment we have not yet made any changes to portfolio composition

WF: How serious is the refinancing risk for NBFCs and HFCs? Has the crisis blown over or is there more pain ahead in terms of ratings downgrades due to persisting challenges in the sector?

Shobhit: The refinancing risk for NBFCs and HFCs has been managed well in the last few weeks as the money markets are returning to normalcy. While the tight liquidity environment has eased, growth rate of the NBFC sector is likely to slow down. This in turn could have an impact on the asset side performance and some impact on credit ratings over the medium term for a few entities.

WF: Recent events have put a spotlight on credit risk (including ratings risk) and liquidity risk within credit risk funds. In what ways have you tried to safeguard your portfolio from these risks?

Shobhit: Our Fixed income investment philosophy is focused on credit quality. We have a philosophy of SLR, generally prioritized in the order of Safety (Superior credit quality companies with low probability of default), Liquidity (Endeavour to invest in securities with better liquidity) and Returns (Better risk reward ratio). Even in the best of credit environments, our endeavour is not to take undue credit risk, even at the cost of marginally lower Yield to Maturity (YTM).

Our Credit Risk Assessment framework lays emphasis on Four C’s of Credit - Character of Management, Capacity to Pay, Collateral pledged to secure debt and Covenants of debt. Our investment limit setting is done through a Credit Scoring Model which factors – Parentage, Financials, Rating & Outlook. With our focus on high credit quality, we have largely avoided major credit stresses or events over the last several years. Additionally, as on October 31, 27.95% of our portfolio is in AAA assets (Including Cash and Sovereign), which takes care of any liquidity requirements.

WF: Last 1 year returns from credit risk funds as a category have been disappointing. What can we look forward to in terms of likely returns over the next 12-18 months? What is the current YTM of your portfolio?

Shobhit: Over the last one year, returns from credit risk funds have suffered due to the significant rise in corporate bond yields. Given high yields are now available on good quality credits, the risk reward trade-off has once again become attractive. The portfolio yield on HDFC Credit Risk Fund as on 31st October, 2018 has improved to 9.93% from the low of 8.22% a year back.

WF: What is the investment argument for fresh money to be invested now in funds like your Credit Risk Fund, with a 3 year perspective?

Shobhit: Credit Quality continues to be central focus of our investment philosophy. With our credit risk assessment framework, we have been able to avoid any major credit stress/event on our portfolio. High yields available on good quality credits offers attractive risk reward trade off. The well diversified portfolio of HDFC Credit Risk Debt Fund is ideally positioned to take advantage of current environment.

HDFC Credit Risk Debt Fund [An open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ rated corporate bonds)


Scheme Performance Details

Performance – Regular Plan – Growth Option


Returns as on 31st October, 2018
Past performance may or may not be sustained in the future. The above returns are for Regular Plan - Growth Option. Returns greater than 1-year period are compounded annualized (CAGR). The Scheme is in existence for more than 1 year but less than 5 years. Load is not taken into consideration for computation of performance. Inception Date: March 25, 2014.
#: CRISIL Short Term Bond Fund Index. ##: CRISIL 10-year Gilt Index The scheme is managed by Shobhit Mehrotra since 25th March, 2014. Different plans viz. Regular Plan and Direct Plan have different expense structure. The expenses of the Direct Plan under the scheme will be lower to the extent of the distribution expenses/commission charged in the Regular Plan.

Other funds managed by Shobhit Mehrotra, Fund Manager of HDFC Credit Risk Debt Fund.

Shobhit Mehrotra manages 30 schemes


Returns greater than 1 year period are compounded annualised (CAGR). The above returns are of Regular Plan - Growth Option. Load is not taken into consideration for computation of performance. ^The scheme is co-managed by Chirag Setalvad (Equities) and Shobhit Mehrotra (Debt). Top 3 and bottom 3 schemes managed by the Fund Manager have been derived on the basis of since inception returns vis-à-vis the benchmark. In case the benchmark is not available on the Scheme’s inception date, the returns for the concerned scheme is considered from the date the benchmark is available. On account of difference in the type of the Scheme, asset allocation, investment strategy, inception dates, the performance of these schemes is strictly not comparable. Past performance may or may not be sustained in the future. Load is not taken into consideration for computation of performance. TRI - Total Returns Index. N.A. – Not Applicable. Returns as on October 31, 2018.

Different Plans viz. Regular Plan and Direct Plan have different expense structure. The expenses of the Direct Plan under the scheme will be lower to the extent of the distribution expenses/commission charged in the Regular Plan.


DISCLAIMER: The views are expressed by Mr. Shobhit Mehrotra, Senior Fund Manager -Fixed Income and Head of Credit of HDFC Asset Management Company Limited (HDFC AMC), as on 21st November, 2018. The views are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information given is for general purposes only. Past performance may or may not be sustained in future. The current investment strategies are subject to change depending on market conditions. The statements are given in summary form and do not purport to be complete. The views / information provided do not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Stocks/Sectors referred above are illustrative and not recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. The above has been prepared on the basis of information which is already available in publicly accessible media. The above should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund/HDFC AMC to buy or sell the stock or any other security covered under the respective sector/s. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme(s). Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. For complete portfolio/details refer to our website

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