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High yield opportunity for HNIsAshish Jalan, Nippon India AMC, Mumbai

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Nippon India has launched its Nippon Credit Opportunities AIF Scheme 1 (Cat II AIF) which targets inflation beating returns net of taxes for HNIs who have the necessary risk appetite for credit risk.

The scheme will invest in 8-10 transactions in the A to BBB credit rating range with an average maturity of around 3 yrs, in a 5.5 year closed ended structure. The scheme is targeting an IRR in the 12-16% range pre expenses. A target return of 13-14% pre-expenses will give a net return (post expenses, pre tax) of around 12-12.5%. The scheme’s expenses are a flat structure, and are comparable to open ended credit funds in the MF space.

HNIs who are looking for yield are actively considering credit schemes in the AIF space as regulations in the MF space have been considerably tightened, thus preventing them from investing in structured transactions that deliver healthy returns.

Most of the issues in credit risk funds in the MF space were liquidity issues and not credit issues. Nippon India’s track record (across MF and AIFs) in credits in the A to BBB credit ratings range has been a zero default one.

One aspect for HNIs to consider is the health of the credit environment over the next 3-5 years, particularly amidst heightened global macro uncertainties. Ashish says their emphasis will be more on  micro rather than macro – assessing credit risk at an individual issuer level, which will include sensitivities to different macro environments.

Investing in open ended duration funds with a 2-3 year horizon can be another alternative for investors who believe that a declining interest rate environment over the next 2 years can yield healthy capital gains. Ashish believes that even if yields drop by 50 bps in 2024 and a further50 bps in 2025, returns from duration funds are likely to be lower than credit opportunities AIFs like his.

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